Due Diligence of the SBA

For years, the SBA loan guarantee program has been one of the most effective methods for successful businesses to get a start or to expand. Nearly one-third of all long-term small business loans are backed by SBA guarantees, in part because the terms make the loans more acceptable to borrowers. Long-term amortization periods and lower rates, often fixed for many years, are attractive to budget-minded business borrowers. In turn, this affordability helps ensure the likelihood of repayment, which makes lenders more comfortable.

There is another element of the process that helps to further ensure the viability of businesses that apply for SBA loans - the element of due diligence

Because the SBA does guarantee a portion of the loans, as much as 90 percent during the recent enhancement periods, banks are more amenable to providing funds. The banks enjoy solid protection, lower risk and higher profits - all factors that provide compelling reasons for banks to loan to small businesses.

But there is another element of the process that helps to further ensure the viability of businesses that apply for SBA loans - the element of due diligence.

When a business owner applies for funding through the SBA loan program, he or she is faced with a variety of requirement that must be satisfied. These will include loan applications by both the businessperson and the lender, personal background and financial statements, three years (if existing) of business financial statements and a financial projection. These are only the beginning of the process, which can seem daunting to many new business owners, however the committed individual will move ahead.

Many business owners feel that the paperwork involved makes the process nearly impossible. This is completely false. If anything, the paperwork is the same or even lower than conventional loan since the loan risks are lower. If you have applied for a residential loan and seen its extraordinary amount of paperwork, the SBA is the proverbial piece of cake.  Besides which, if your loan has a 10 year period, this is a small investment of time. In other words, it is WORTH it  to do the process. And who knows, you may get approved.

Remember, that it is in the best interest of all parties - business owner, lender and SBA - that every possible issue be identified and explained. To further protect both the SBA and the lender, and therefore the most viable business borrowers, recently a new requirement has been added to the application and verification process. By January 1, 2012, all SBA approved 7(a) lenders and Certified Development Companies must sign up for and begin checking the Credit Alert Verification Reporting System (CAIVRS).

Just what is CAIVRS and why does my lender need to check it, you may ask. In short, it is a federal verification website that will allow a lender to verify that a borrower does not have any defaulted or foreclosed federal loans, such as student loans. The requirement, known as SOP 50 10 5, became effective on October 1, 2011, but lenders have been given until December 31, 2011, to sign up and be fully compliant.

The new regulation states: “Delegated lenders are responsible for checking the Credit Alert Verification Reporting System (CAIVRS) to determine if any of the individuals or businesses identified in paragraph (4) immediately above has either a Delinquent Federal Debt or a Prior Loss which would result in the Small Business Applicant being ineligible for SBA financial assistance.”

While this may seem another unnecessary step in the process, it is actually one of the few ways the government works to limit its liability. In the 24 years the program has been in effect, it has helped federal agencies avoid billions of dollars in potential losses from loans to individuals who have already defaulted on a government loan. HUD alone estimates it has avoided over $4 billion in losses and another $12 billion in potential claims.

So what does this mean for the borrower? First, if you are in good standing with the federal government - as to loans, at least - you have nothing to be concerned about. The duty of checking falls to the lender alone. Second, if you are a responsible business owner looking for an SBA-guaranteed loan, you can feel satisfied that something is actually being done to prevent irresponsible individuals from tainting the application process. Finally, if you are an SBA-approved lender, this gives you one more step in your due diligence process to ensure that any loans you make have the best probability of repayment.

If you are a business owner and are looking to apply for an SBA-backed loan, your first step should be to contact someone who can answer any questions you have and help you verify that you are, indeed, on the right track. Not every business owner will be approved for an SBA loan, and not every business owner should even apply. Get your questions answered and your situation evaluated before going through the entire process.

If you would like to get an honest evaluation of your position and chances of success on an SBA loan, you can contact me at the sites and/or numbers below. If you are looking to open a restaurant, I encourage you to watch the information video on this site. I wish you a good year end and a successful 2012.

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com, on LinkedIn, or at 888-666-9722.