August 12, 2020

C-Suite Wednesday — 10 7(a) Loan Underwriting Guidelines during the COVID Pandemic

By Bob Coleman
Editor, C-Suite Wednesday

SBA recently released guidance on underwriting 7(a) loans during the COVID pandemic.

Here are the 10 SBA 7(a) loan underwriting guidelines per SBA Procedural Notice 5000-20042 dated August 7, 2020.

(1) Does the applicant have any other loan(s) (PPP, EIDL, or other stimulus financing, etc.) that have repayment or contingent repayment requirements that could impact cash flow? If yes:
a. What is the loan’s status (on deferment, past due, for PPP loans forgiveness application in process etc.)?
b. What is the cash flow during and after any payment deferment period?
c. What will the cash flow be if the loan is fully, partially or not forgiven?
d. What lien position will the new 7(a) loan have?

(2) Based on the sector and industry in which the applicant operates, how is the industry and the business impacted by the COVID-19 emergency? Have the applicant’s business revenue and staffing levels have been impacted, and has the applicant provided a plan to return to normal operations? Does the business have a contingency plan for revenues and operations for a minimum of the next 18 months (i.e. changes in products and/or service)?

(3) How have any restrictions such as “stay-at-home orders”, social distancing, travel, traffic flow, and trade limitations impacted the applicant’s cost projections, clientele or access to supplies, inventory and/or equipment?

(4) What are the other impacts to the business’ operational cost(s) such as providing protective gear, cleaning materials and essential costs to ensure the safety of customers and employees?

(5) Is the historical financial information reliable based on current market conditions? Consider using month to month financial proforma with break-even analysis based on current market conditions (i.e. unemployment rates, decreased household disposable income).

(6) How concentrated or diversified is the customer base? How reliant is the applicant on sales to or receivables from customers in those concentrations?

(7) How concentrated or diversified is the applicant’s vendor/supplier pool, and which, if any, vendors/suppliers have decreased ability to support the business?

(8) Discussion of the impact current market conditions have on collateral adequacy.

(9) For Change of Ownership loans, given current market conditions, does the applicant have adequate industry experience to operate the business? (see Business Valuation below). Does the seller have any other loan(s) (PPP, EIDL, or other stimulus financing, etc.) that have repayment or contingent repayment requirements that could impact cash flow? If yes, the Lender must address the issues in 1. (a)-(d) above and follow any requirements applicable to the other loan program(s).

(10) For any loans where 50% or more of the loan proceeds will be used for working capital, the Lender should specifically address in its credit memorandum why this level of working capital is necessary and appropriate for the subject business in light of the COVID-19 emergency

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