The purpose of the SBA guarantee is to allow banks the opportunity to lend to borrowers whose financial situation does not fit the conventional loan profile. The most common financial weaknesses, which are best mitigated by the SBA guarantee, are:

• Weak collateral
• Weak equity injection
• Rapid expansion
• New business (less than 2 years old)
• Loan needs longer maturity and flexible terms required
• Loan request exceeds Bank's Total Client Exposure (TCE) policy limit
• Bank's liquidity depends on selling guaranteed loan in secondary market

SBA loan proceeds cannot be used for any of the following:

• To pay off inadequately secured creditors who would otherwise sustain a loss, or provide funds for payment to the owners, partners, or shareholders of the applicant
• For speculation in any kind of property
• To pay delinquent taxes

The following is a list of borrowers that are not eligible to participate in the program.

• Nonprofit organizations
• Applicants serving international markets exclusive of the domestic U.S.
• Speculative and pyramiding ventures
• Schools teaching academics or ideology
• Business concerns for which principal income is from gambling activities
• Advertising and other media businesses
• Movie theaters
• Door-to-door sales activities
• Lending or investment businesses
• Business concerns in which ownership interests are held by government employees

The Bank makes every effort to accommodate the SBA loan applicant because it is good business to do so. The most common reasons the Bank may be unable to assist an applicant with financing are as follows:

• Inadequate experience in business field. 
  • The Bank generally looks for several years of specific experience either as an owner or as a management employee. 
  • Related experience can satisfy this requirement as long as there is sufficient evidence of successful management skills;
• Lack of reasonable assurance of repayment from business operations.
• Lack of a well-thought-out business plan.
• Inadequate equity investment.
• Poor credit history.

• Character
  • The borrower must be of good character. This is demonstrated by a clean credit history and positive direct checking of other creditors and banks. Loans cannot be considered for applicants who are defendants insignificant pending litigation.
• Management Expertise
  • The borrower must demonstrate management experience and capability in his field of activity. This can be through several years of current or previous ownership of a similar business or management experience in the same or similar businesses.
• Business Plan
  • The borrower must provide the Bank with sufficient written documentation to demonstrate that he or she has thoroughly considered the loan transaction, the business’s prospects for success and a realistic operating plan to attain it.
• Cash Flow Coverage
  • The borrower must demonstrate its ability to meet debt service requirements either from historical cash flow or through conservative and realistic projections. Financial analysis of historical income statements and/or proforma financial statements show borrower has a debt coverage ratio that exceeds 1:1.
• Profitability
  • The business entity must have established a historical record of profitability for a minimum of one year. Depending on the industry, additional years of profitability maybe required. If a start-up business, conservative and well-supported projections must demonstrate profitability within the first year of operation.
• Trends
  • Historical trends of an established business must be positive for the current period and prior two years of operation. Start-up businesses must be in industries, which can demonstrate positive trends through documentation such as trade reports.
• Primary and Secondary Source of Repayment
  • Every SBA loan must have two distinct, unrelated sources of repayment. The primary source will be cash flow from operations and the secondary source will be recourse to collateral. The SBA guarantee itself is not considered a primary or secondary source.
• Other Considerations
  • All normal due diligence criteria for the collateral type is to be met, including appraisal and environmental assessment reports. In addition: 
    • Financial information is required on any principal owning 20% or more of the business.
    • Personal unlimited guarantees are required of any person owning 20% or more of the business. For ownership less than 20%, a partial guarantee may be considered in lieu of the full guarantee.
    •  The business lease should cover the term of the loan. Lease options are acceptable.
    • Businesses may be affiliated by common ownership, common management, or by contractual relationships. The applicant, along with subsidiaries or affiliates may qualify as an eligible small business if either group considered as a unit is eligible.
    • SBA loan proceeds cannot be used to pay delinquent taxes.
    •  Landlord’s waivers are usually required.

Real estate financing requires a minimum of 10% borrower’s equity.

Working capital loans are generally secured by the business assets, personal guarantees, and real estate. Real estate financing is secured by the real estate and possibly a business asset. It is SBA policy for loans greater than $150,000, that all available business and personal collateral up to the loan amount be pledged to secure the loan. SBA considers a loan to be fully secured if the lender has taken security interest on all assets with a “combined liquidated value” up to the loan amount. If there is a collateral shortfall, and there is other available collateral, the lender will be required to take such collateral, including the personal assets of the principals. Liens on a personal residence or investment property may be limited to 150% of the equity in the collateral, rather than the loan amount. SBA does not require a personal residence to be taken as collateral if the equity in the residence is less than 25% of the property’s fair market value.

The ability to repay the loan from the business’ cash flow is the most important consideration. Cash flow from prior operations would constitute the best evidence of repayment ability. Interim operating statements on their own cannot be relied on as a basis for recommendation and approval. Where historical cash flow does not indicate repayment ability, a realistic projection of future earnings must be used. The proforma must be supported by valid comparable data.

The secondary source of repayment comes from collateral in the form of real estate or a security interest in the assets of the business or both. Collateral should never be considered as substitute for repayment when considering a loan request. If a borrower does not have reasonable assurance of repayment from the earnings of the business, the loan should be declined. When the collateral is insufficient, it can be offset by other factors such as strong repayment ability and management potential. If collateral is not available, other collateral enhancement, such as guarantors or co-borrowers, can strengthen the credit.

A minimum 10% of borrower's equity is required.

504 loans are secured by the real estate in question and possibly business assets. An environmental investigation must be performed for all commercial property to be encumbered. The type and depth of the investigation to be performed varies with the risks of contamination. If there is a North American Industry Classification System (NAICS) code match, the environmental investigation must begin with a Phase I Environmental Site Assessment. If the NAICS code does not match, and loan is below $150,000, an environmental investigation begins with an Environmental Questionnaire; if the loan is more than $150,000, the environmental investigation begins with an Environmental Database report.

The SBA provides up to $1,500,000 in subordinate financing on the debenture portion, when the credit fulfills the job creation criteria or a community development goal; $2,000,000 when fulfilling a public policy goal; and $4,000,000 for a small manufacturing as defined by the SBA. The proportion of the guaranteed amount to the non-guaranteed amount depends on the financial strength of the borrower with the entire loan subject to the normal approval authorities within the Bank.

• Interest Rate/Fees: To be determined.
• Maximum Term: Loans will be underwritten for a maximum 25 year term and maximum 25 year amortization. 
• Loan to Value Ratio: Not to exceed a combined loan to value (CLTV) of 90%
• Maximum Loan: Loans in excess of $2,000,000 will be considered on a case-by-case basis and should be discussed with Credit Administration.
• Credit Criteria: All 504 loans must meet normal underwriting and due diligence criteria, including debt service ratios, appraisals, and environmental assessment reports.

There are 2 loans generated by this program and the rates, terms, and fees differ with each loan. The debenture is a fixed rate loan for a period up to twenty years, while the bank loan is a variable rate loan with a 20 year amortization. Equipment can be financed for the lesser of its useful life or up to 10 years. The Bank charges a fee for the permanent loan, a portion of which is paid to the CDC as a third party lender fee. A loan packager/Certified Development Companies (CDC) will also charge a fee for the debenture.

Eligible businesses and their affiliates (as defined by SBA) must pass the SBA guaranty loan requirements as well as the following:

• Minimum business history of 1 year.
• A tangible net worth not to exceed $15 million, and average net income (excluding carryover losses) for the preceding 2 completed years of $5.0MM or less.
• The borrower is to lease 100% of the property; the borrower may sublease up to 49% of the overall square footage of the building.
• The appropriate level of environmental investigation.

The ability to repay the loan from the business cash flow is the most important consideration when underwriting the SBA loan. Cash flow from prior operations would constitute the best evidence of repayment ability. Interim operating statements should reflect consistency with prior years but should not be used as the sole basis for approval. Where historical cash flow does not indicate repayment ability, a realistic projection of future earnings must be used. The proforma must be supported by valid comparable data.

For the 504 loan, the secondary source of repayment comes from the real estate collateral and, if applicable, a security interest in the assets of the business. The Bank should never consider collateral a substitute for repayment when considering a loan request. If a borrower does not have reasonable assurance of repayment from the earnings of the business, the loan should be declined.

All SBA loans require an in-depth interview with the loan applicant and a field visit by a Bank officer prior to recommending formal Bank approval and submitting the loan request to the SBA. The purpose of the field visit is to insure that the loan purpose is properly stated by the borrower, to review any environmental issues that may exist on collateral real property and to evaluate business operations.

The Bank underwrites quality SBA loans to protect the interest of the Bank and the U.S. Small Business Administration. SBA loans must meet the underwriting criteria of both the Bank and the U.S. Small Business Administration.

Minimum information Required from Borrower: The borrower is provided with a package of information, including a checklist. The checklist contains the information that the borrower must provide the Bank to allow for a thorough evaluation of the credit request. The minimum financial information the borrower should provide for initial screening is:

• 3 years tax returns for the business
• 3 years tax returns for principals and guarantors
• Current financial statement for principals and guarantors (within 30 days of application).
• 3 years fiscal year end statements on business, when available
• Current interim financial statement on business (within 90 days of application)
• Current accounts receivable and payable agings (within 30 days of application)
• At least 1 year of earnings projections
• 3 years tax returns and financial statements on any affiliated businesses
• Business plan to include business history and resumes of all key principals

The Loan Officer will evaluate the application package and determine:

• If the applicant qualifies for an SBA loan in terms of size (for example: annual sales or number of employees), by using the NAICS code of the business.
•  If the loan package has sufficient information, business and personal, to be evaluated.
•  If the applicant meets the credit criteria.
• If cash equity requirements are met.

Experian or equivalent reports for individuals and a Dun and Bradstreet Business Report or equivalent report for business applicants are ordered. Personal credit reports may not be ordered unless the applicant has provided written authorization. Credit history must meet the underwriting guidelines set forth in this policy.

The Loan Officer, Credit Analyst, or Underwriter will:

• Prepare business cash flow statement, personal cash flow statement, and spreadsheets of the business statements.
• Determine if the company can generate adequate cash flow to service the proposed loan, including short-term and other long-term obligations.
• Examine if key ratios are comparable to industry standards.
• Analyze sales trends and determine if enough profit can be generated to keep the business a going concern.
• For start-ups, determine if income and expense projections and assumptions behind the projections are reasonable and make sure that the borrowers inject at least one third of the project cost.
• For business acquisition, equity of one third of the project cost is typically required. Historical financial information on the business including cash flow and key ratios must be analyzed.

Commercial property acquisition should have at least 10% down payment.

Loan applications must be thoroughly evaluated and analyzed before a recommendation can be made to approve or decline the request. Alternative courses of action should be considered and recommended if there is not enough information to arrive at a final decision or if the loan does not fit within the SBA loan framework.

The Credit analysis should include but not limited to the following:

• A description of the history and nature of the business.
• A description of and comments on the business plan including financial condition of the business need for the business in the area (if new) and competition.
• A discussion of the owners and managers’ relevant experience in the type of business, as well as their personal credit histories.
• A financial analysis of the current balance sheet before and after the loan to include any required adjustments such as any equity injection, including a discussion of its adequacy, or standby debt.
• A financial analysis of repayment ability based on historical income statements and/or tax return (if an existing business) and projections, including the reasonableness of the supporting assumptions.
• A ratio analysis of the financial statement including comments on any trends and a comparison with industry averages.
• An analysis of collateral adequacy, including an evaluation of the collateral and lien positions offered as well as liquidation values. (For further guidance, please see SBA SOP 50 51 2, Loan Liquidation and Acquisition Property).
• A discussion of the Bank’s credit experience with the applicant and a review of the business credit reports.
• The effect any affiliates (as defined in 13 CFR Part 121) may have on the ultimate repayment ability of the applicant.
• A site visit consistent with the Bank’s internal policy for similarly sized non-SBA guaranteed commercial loans.
• A discussion of whether the operating business is the subject of any Federal, State, or local citations (including probation), or any other actions which would preclude it from normal business operations.
• Other relevant information (for example: If the application involves a franchise, the Bank must review the franchise agreement and all related documents including the franchise disclosure document and any credit information provided such as the number of failed franchisees and cash flow projections provided by the franchisor).

Appraisals are required on real property according to the Bank’s real estate lending policy, and appraisal policies and procedures. Appraisals are not typically ordered until receipt of a signed Expression of Interest (EOI) letter and the appraisal fee.

Flood Determinations are ordered through an online service that provides a Flood Certificate and Flood Notice (if in a flood zone). The Flood Determination form must accompany the appraisal report. It is reviewed and signed by the Loan Officer.

SBA loans require the same evaluation and due diligence accorded any other real property collateral. All commercial and industrial property loans require at a minimum a site visit and an Environmental Questionnaire. Single-family improved properties are evaluated by the appraiser for environmental issues. Environmental Reports are ordered after receiving the signed commitment letters and the report fee.

If equipment, machinery, and fixtures are collateral, a Uniform Commercial Code (UCC)-3 (pre-search) needs to be completed and reviewed prior to loan closing.

Hazard insurance is required on all real and personal property taken as collateral. Policies or certificates require a loss payee endorsement with the Bank listed as the loss payee and the SBA number noted on the policy.

The following are the insurance requirements based upon various types of collateral.

Insurance information is requested in the initial loan package. Based on that information, the loan processor requests that the agent provide proof of insurance coverage through a certificate of insurance or a policy. If insurance information is incomplete or is not furnished at the inception of the loan request, the loan processor will request such information prior to completing the SBA Loan Authorization. SBA loans may not be funded unless written proof of adequate insurance coverage is in the Bank’s possession.

An assignment of life insurance covering key individuals is generally required in 2 situations:

• When the borrower is a professional individual such as a doctor, dentist, or attorney and is the sole generator of the business income, or
• When the company is dependent upon a particular individual whose demise would seriously jeopardize the company’s operation.

The amount of insurance should cover the loan amount and if 2 or more individuals contribute life insurance assignments, the aggregate combined amount is usually no greater than the loan amount. The policy should be evaluated for its appropriateness for assignment. The following are general issues to consider:

• Group insurance policies are usually not acceptable.
• The borrower should own the policy.
• He/she must have the power to assign the policy.
• The proceeds must be payable in a lump sum.
• There must not be other loans or assignments which would reduce the proceeds.
• Any automatic premium or disability premium payments must not reduce proceeds or cash value.
• The beneficiary must be able and willing to sign the assignment. 

At closing and prior to funding the following documents are required:

• Original life insurance policy.
• Assignment form signed by the insured and the beneficiary and acknowledged by the head office of the life insurance company. The assignment may be evidenced by either a form provided by the Bank or a form provided by the life insurance company subject to the Bank’s review and acceptance.
• Statement by the life insurance company of policy status. This could be a life insurance questionnaire or provided within the assignment document.

On a case-by-case basis the loan may be funded without receipt of the life insurance company’s acknowledgment if the agent has given the bank sufficient assurance that there are no other loans against the policy and that the company intends to sign the assignment. Approval of the Chief Credit Officer is required.