The SBA has played an important role in the national response to the pandemic. The agency – along with the rest of the country – is adjusting to a new reality where COVID-19 is expected to have a significant financial impact on many businesses now and well into the future. In response, the SBA has updated its underwriting guidelines to reflect new COVID-19 criteria.
SBA Standard Operating Procedures (SOPs) already require that lenders analyze each 7(a) loan application in a commercially reasonable manner, consistent with prudent lending standards. The SOPs also provide that cash flow is primary source of loan repayment, and not collateral.
“Prudent underwriting” during the COVID-19 emergency means that 7(a) loans should be analyzed with consideration for COVID-19’s impact on a business’s current and future operations, cash flow and repayment ability.
Here is a summary of the 10 new COVID-19 considerations outlined for SBA 7(a) loans. Please refer to the SBA procedural notice for full guidance. (VITAL clients can always contact our SBA lending team with questions.)
1. Does the applicant have any other loans, such as PPP, EIDL, or other stimulus financing, that have repayment or contingent repayment requirements that could impact cash flow?
2. How is the industry and the business applicant affected by the COVID-19 emergency, such as impacts to revenue and staffing levels? Is there a plan for returning to normal operations, and a contingency plan for modified product and/or services for at least the next 18 months?
3. How have restrictions such as “stay-at-home orders,” social distancing, travel and trade limitations impacted the applicants cost projects, clientele, or access to supplies, inventory, or equipment?
4. How does COVID-19 impact operational costs, such as providing protective gear, cleaning materials, and measures to ensure the safety of customers and employees?
5. Is historical financial information reliable under current market conditions?
6. How concentrated or diversified is the business’s customer base, and how reliant is the business on sales or receivables to customers in those concentrations?
7. How concentrated or diversified is the business’s vendor/supplier pool, and which have a decreased ability to support the business?
8. Have current market conditions impacted collateral adequacy?
9. For Change of Ownership loans, given current market conditions, does the applicant have adequate industry experience to operate the business? Does the seller have other loans with payment or contingent repayment requirements that could impact cash flow?
10. For any loans where 50% or more of the loan proceeds will be used for working capital, lenders should address why this level of working capital is necessary and appropriate in light of the COVID-19 emergency.
SBA 7(a) loans have been a trusted and highly valuable source of small business financing since the 1950s. The program continues to evolve, and the updated COVID-19 underwriting criteria are the latest change to help lenders meet the needs of this current period in time. 7(a) loans are perhaps more valuable in 2020 than any time in recent history, and continued adaptations of the program will ensure it remains relevant far into the future.