Starting January 1, 2014, there will be some significant changes that financial institutions will have to follow when making SBA guaranteed loans. Many of the changes involve the manner in which lenders analyze adequacy of cash flow, collateral, key ratios and other technical underwriting factors, but other will have a direct impact on borrowers. These changes must be taken into consideration when thinking about arranging financing by both existing and prospective small business owners.
Included among these changes are:
- Streamlined Guaranty Product Offerings: The SBA is streamlining the guaranty products it offers borrowers. Loans of $350,000 or less will be considered under one track that combines Express and 7(a) loans while those greater than $350,000 will be considered under the standard 7(a) loan process.
- Termination of the Patriot Express Loan Program: This pilot program, which specifically served Veterans and their spouses, will not be available after December 31st of this year. The SBA will, however, waive their guaranty fee on all Express Loans approved for Veterans through September 30, 2104.
- Small Loan Advantage (SLA) Program: All lenders who are requesting an SBA loan guaranty on loans of $350,000 or less will have to submit the request through the SLA program. In return for using this program, lenders will receive up to an 85% loan guaranty from the SBA, which is significantly higher than the 50% guaranty currently offered under the Express Loan Program.
- Credit Considerations: The SLA Program is credit-score based and, under this program, the lender must submit credit-related information on any business owners and co-signers (guarantors) to the SBA which will use a series of algorithms to create a proprietary Liquid Credit Score (LCS). If the applicant does not meet the threshold LCS score then the loan application will have to be submitted via the general 7(a) loan guaranty program or the Express program with a 50% guaranty. The credit pre-approval process is mandatory for all loan applications and precedes the submission of the completed application. All prospective borrowers need to be sure that they have checked their personal credit to ensure that the reports are accurate. Good personal credit is critical given that this is one of the primary means that lenders use to assess the “character” of the borrower.
- Dun and Bradstreet Number (DUNS): All Small Loan Advantage Program applicants, either prospective or existing small business owners, will be required to have a DUNS number prior to submitting a loan application to their financial institution. This number is provided free of charge by Dun and Bradstreet. More information can be found at www.dnb.com.
Given the scope and scale of the changes which are slated to go into effect at the beginning of the year, prospective borrowers should factor in their timelines an increase in time it will take for their financial institution to reach a decision concerning their loan package. Lenders will have a steep “curve” in both learning and implementing these new changes. It is strongly recommended that borrowers discuss, well far in advance as possible, their loan application package to ensure that all the administrative requirements are completed as early in the process as possible. This will aid considerably in the approval process.
Mike Austin is an SBA lender at Fulton Bank in Virginia Beach who has over 25 years experience in making and administering SBA guaranteed loans. For the past 16 years, Jim Carroll has served as the vice president for small business for the Hampton Roads Chamber of Commerce and as the executive director of the Small Business Development Center of Hampton Roads, Inc.