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SBA C-Suite Tips Wednesday — Properly Document Equity Injections

September 18, 2019

By Caity Witucki
Contributing Editor, SBA C-Suite Tips Wednesday

SBA C-Suite Tips Wednesday — Properly Document Equity Injections

The number one reason for an SBA loan denial is failure to adequately document an equity injection. According to the SOP, “adequate equity is important to ensure the long-term survival of a business.” Not only can inadequate analysis of equity result in early-defaulted loans, but it can also hurt your institution’s relationship with the SBA.

When the SBA learns that an institution failed to verify an equity injection after they have already been paid the guaranty, the SBA will often require the institution to bring the loan into compliance or reimburse the SBA for the full amount – “plus interest.”

If a lending institution continuously fails to demonstrate their ability to evaluate, process, close, disburse, service and liquidate small business loans, then the SBA may refuse or revoke their SBA lending status. Although any continuous material failure to follow SBA rules and regulations could hurt your institution’s relationship with the SBA, a recent OIG review put a strong emphasis on following SBA rules and regulations for supporting equity injections.

The OIG report specifically evaluated a $2,355,000 loan that went into default after the borrower had made just 11 payments. After the SBA purchased the guaranty an OIG investigation revealed that the loan should not have been approved because the lender did not adequately support the intended use and source of the required equity injection. Although the lender documented a $164,353 equity injection for the purpose of obtaining medical equipment, only $64,685 of the equity injection was used as intended. Furthermore, $61,953 of the injection was paid by a non-income producing borrower. As a result, the lender was required to seek recovery of the full amount of the loan plus interest.

This OIG report illustrates the importance of properly documenting the use and source of all equity injections. It is a good idea to ensure your SBA team understands that proper documentation of equity injections is not only necessary to avoid early defaults, but also crucial for maintaining a good relationship with the SBA.

Source:
SBA Inspector General Management Advisory Report Number 19-16.

Previous Reporting:
SBA Inspector General Denys Two 7(a) Loan Guarantees – August 20, 2019

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