When Is 100% Not 100%? Steps to Ensure Your SBA Loan Guarantee
The recent launch of the Small Business Administration’s (SBA) new Paycheck Protection Program (PPP) has given me a lot to think about. Unlike many, I have some mixed emotions over the program.
There are many benefits to the PPP. People’s paychecks and jobs will be secured for a little longer, helping Americans to hold on to their personal and business assets. Hopefully long enough to get past the coronavirus pandemic and social distancing practices. Maybe even a little longer if our Federal Government decides to throw a couple of more dollars into the pot. Potentially, small businesses across our land will be able to remain open or even re-open once we’re on the other side. This is just what we do as Americans – pull up the bootstraps and help each other out when we are all put to the test like this.
My concerns lie within the financial industry. As you may begin to discover, the SBA is not to be trifled with. An SBA loan guarantee is, in this banker’s opinion, a guarantee in name only. The issue lies at the end when, and if, the guarantees on these credits become necessary. So, what steps may be important if your borrower comes up on the short end and cannot repay this loan? Here are steps you should take now to ensure that your financial institution’s guaranty stays at 100%.
Step 1: Follow the Underwriting Guidelines.
It is crucial that the standard operating procedures for SBA underwriting loans is strictly followed. This may come as a challenge as there has been little guidance on specifics for underwriting the PPP loans. The good news is there is still guidance on how to do other SBA programs and they all read very similar. The latest interim final rule for the program at the time this article is being published gives the best interpretation of what documents are necessary. You can access the full document here.
Step 2: Ensure Your Borrower Is Well Informed.
Successfully following the underwriting guidelines is crucial, however, it only gets us to an approved loan. Ensuring all the eligibility forms are done correctly and that a borrower has a full understanding of what they are signing will also help. Take the time to go over each eligibility question. Make sure your bank loan customers are asking questions, so they fully understand. I would also suggest explaining how the SBA loan guarantee (and SBA express loan) works, repayment terms, and what needs to happen to ensure the small business borrower is safe if they ultimately have to close operations.
Step 3: Disburse Funding and Document Every Dollar.
Once you are at the closing table and documents are signed, the next step is disbursing the funds. While this may have been a simple task in the past, this is where many a guarantee comes apart. For this program, the government is allowing certain types of day to day expenses to be included along with payroll expenses. It’s important for the treasury department or payroll provider not to make assumptions based on past experiences. Be sure to review what expenses can be included with payroll. If you do nothing else correct in lending PPP funds, document each dollar that is used and where it goes. Collect each bill that is paid, and a copy of each check used to pay that bill. Explain everything that can be explained. If there is a time to be overly detailed in managing a loan, this would qualify as that time. As a Special Assets Banker for many years, I have seen repair after repair issued due to lack of disbursement documentation on SBA loans. Repairs are equal to the guarantee percentage withering away. The guarantee is only as good as the documentation supporting it. With a program that is initially funded with $350 billion, no one wants to see that risk transferred back onto bank balance sheets within the 24-month term of these facilities.
Step 4: Use Prudent Lending Practices.
The SBA continually refers to prudent lending practices. Most of us hear that and we see origination and underwriting. We seldom include managing a loan or managing the expectation of how a loan is to perform. We rarely dig through the weeds to explain how an SBA guarantee works and how it can affect our approved lenders. So, let’s do the prudent thing. Let’s make certain our small business loan customers are informed of how the guarantee works, what happens if the SBA loan does go into default, and what they can do to help you ensure that their SBA loan is not one that cannot be forgiven at the end of the day.
Your institution and your special assets department (or SBA lenders) will thank you for doing the upfront work of keeping those SBA guarantees intact.
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Posted on Tuesday, April 21, 2020 at 9:45 AM
by Kevin Dooley
As a Senior Business Process Architect, Kevin Dooley guides implementations for new and existing clients. Dooley relies on his 20 years of Commercial Banking and Special Asset experience to support client success. He provides both strategic and tactical recommendations regarding current credit philosophy and assists financial institutions with implementing and executing credit evaluation and portfolio management strategies.
Dooley earned his bachelor’s degree from Purdue University in Political Science and his master’s degree in Finance from Indiana University’s Kelly School of Business.