Guest article by Karen McHugh by way of Bob Coleman
What separates a conventional commercial loan from a SBA guaranteed loan? Bottom line is that no matter how creditworthy the deal is, if the loan does not comply with SBA program eligibility requirements, the lender is wasting their time hoping for a guarantee on the transaction. Therefore, eligibility requirements must not only be met, the lender must provide documentation supporting the decision.
It is not necessarily enough to document eligibility decisions just with the SBA Eligibility Checklist (PLP, Express, etc.). The Eligibility checklist is just that-a checklist guiding the lender in determining what eligibility criteria must be met. Certain program eligibility issues require substantiation. Some examples include:
Refinancing Existing Debt
When refinancing existing debt, the lender must document that:
* They will not use the SBA loan to pay off a creditor in a position to sustain a loss.
* They will not refinance debt already on reasonable terms.
* The new loan provides a substantial benefit to the small business.
o Improvement to payment is required for long-term notes (calculation required).
* They will take the same collateral securing the debt being refinanced .
There are certain questions that must be answered such as “Why was the debt incurred?” and “Is the borrower over obligated?”
If the lender is refinancing their own debt, they must document that the loan is current by providing a copy of the transcript of account, and they must make sure to submit the loan through non-PLP processes.
If credit cards are being refinanced, SBA requires a borrower certification that the credit card has only been used for business purposes, and if a personal credit card is being refinanced, copies of receipts are required.
Also, be sure to base the loan maturity for the portion of the SBA loan used for refinancing on the original use of loan proceeds for the note being refinanced (not based on the type of assets taken as collateral).