Windsor Advantage's Q&A Corner

SBA Notes of Interest - Underwriting in 2022

1. We are ramping up our SBA program and want to ensure our process is compliant. There have been some concerns around underwriting and how we approach some critical points in our due diligence. Please help us understand "Credit Elsewhere" and how to evaluate this requirement with our borrowers best.

Congress has charged the SBA with being good stewards of the program, and now the SBA has more regulatory powers than ever before. In the last few years, "well-healed" borrowers may have had access to more conventional financing sources approved by some lenders. "Credit Elsewhere" is becoming more of an SBA hot button, and we need to focus on this in our due diligence.

No longer can the lender use the reasons such as 1). "It is outside my geographic footprint" or 2.) "It does not meet our loan policy" or 3.) "The loan does not meet our minimum score."

The lender must examine, certify, and document that the borrower cannot obtain credit elsewhere. The lender must include specific reasons for each borrower and each loan request. It is no longer acceptable to provide a generic checklist of items.

2. The "Personal Resource Test" is vague. Can you provide some guidance?

To ensure sufficient liquid assets are in place of an SBA guaranteed loan, lenders must look at the personal resources of owners with 20% or more ownership, their spouses, and minor children.

The lender must consider all liquid assets such as cash, cash equivalents, marketable securities, and the cash value of life insurance and specifically document these sources.

Today, there are no hard and fast rules regarding the personal resource test. Still, the following are some guidelines that may be prudent in considering the applicant's ability to obtain credit elsewhere:

• If $350,000 or less, each 20 percent owner of the applicant must inject any liquid assets that are more than two times the total financing package, or $500,000, whichever is greater.

• If between $350,001 and $1,000,000, each 20 percent owner of the applicant must inject any liquid assets that are more than one and one-half times the total financing package, or $1,000,000, whichever is greater.

• Exceeds $1,000,000, each 20 percent owner of the applicant must inject any liquid assets that are more than one times the total financing package, or $2,500,000, whichever is greater.

Any liquid assets should reduce the SBA loan amount over the applicable amount as outlined above. The funds must be injected prior to the disbursement of any SBA financing proceeds. In extraordinary circumstances, SBA may, in its sole discretion, permit exceptions to the required injection of an owner's excess liquid assets.

3. Affiliation seems to be more of a focus in SBA lending today. How do we best address this?

Affiliation is a topic that we could spend a lot of time discussing. Still, it must be considered an affiliate when the applicant can exert control over another company regardless of the ownership. The focus on "Affiliates" is essential as they can impair the repayment ability, put the project over the SBA loan maximums, and require a significant time commitment.

Lenders, this is an excellent time to look at SBA lending for your institution. There are sufficient support organizations that you can work with to stay out of hot water and develop internal and external controls to ensure the program is successful. You also can create a consistent delivery system to provide internal buy-ins from your loan officers and external buy-in from your accountants, business brokers, and realtors whose only objective is to get to the closing table. Please focus on these key considerations to always ensure the guaranty is in place should there ever be a default.

Windsor Advantage is the nation’s largest SBA Lender Service Provider and assists lenders nationwide in processing, closing, servicing and liquidations.

For more information, please contact Connor Mulvey, Vice President– Business Development Windsor Advantage, LLC, 444 N Wells St., Suite 201, Chicago, IL 60654 P: 312-585-6596 C: 708.408.1820