SBA Hot Topic Tuesday – The Importance of Underwriting Cash Flow Projections

July 29, 2014

By Bob Coleman
Editor, Coleman Report

sbaoiglogo2Our third installment of SBA Inspector General audit criticism of the Loan Guaranty Processing Center in Citrus Heights is about cash flow projections.

Specifically, prudent lenders must credit underwrite cash flow projections to assess if the numbers are reasonable.

In 2011, SBA approved a $243,000 based on projections using estimated revenues and expenditures supplied by the borrower’s franchisor for the first two years of the business.

However, these revenue projections were based on the annual average sales for all 882 franchised restaurants and the lender did not provide supporting documentation to show how revenues and expenses were calculated for the subject borrower’s franchise.

Further, the lender’s financial analysis did not address competition in the area in which the business would be operating. The information on business competition was important in determining whether the provided projections were reasonable.

This business defaulted within eight months of disbursement and only two months after the initial six-month interest only period.

Information within the SBA’s purchase file supported that significant competition within the business’s area of operation directly contributed to the loan’s default.

The SOP states that for loans submitted to the LGPC, the SBA approves the loan for both credit and eligibility

It also states that the analysis must include a description of and comments on the need for the business in the area (if new), and competition. In addition, it must include a financial analysis of repayment ability based on historical income statements and/or tax returns (if an existing business) and projections, including the reasonableness of the supporting assumptions.


Read the full Audit Report 14-13: Significant Opportunities Exist to Improve the Management of the 7(a) Loan Guaranty Approval Process