Tip of the Week
Documenting Global Cash Flow "The SBA Way"
When we conduct lender training or coaching, or simply respond to one of our Lender Lifeline clients - the topic of doing things "The SBA Way" often comes up. Remember, we operate under the Golden Rule in SBA lending, "He that has the gold, makes the rules". And if you ever need to cash in on the "gold" of the SBA guaranty, then we need to follow the rule, simple right?
Well not always. Take for example SBA's recent emphasis on global cash flow. We understand the SBA loan processing center in Citrus Heights/Hazard for Non PLP 7(a) submissions is requiring more information about global cash flow, than ever before. Global cash flow is defined as the combined business and personal cash flow that is required to satisfy all of the obligations of the business AND of the individual sponsors of the business. However, the SBA Form 413 (personal financial statement) has no place on the existing form that prompts the lender for personal income/expenses of the principals. It is one of those "you are just supposed to know" things in this business.
So what is a prudent SBA lender to do about global cash flow? We recommend to our lender clients that they implement a personal cash flow form that prompts their guarantors about the "family" budget - all key sources of income (salaries, both from the business and outside the business, such as spousal income) and all key monthly expenses such as home mortgages, car loans, credit card debt service, home budget items etc. This analysis is important for several reasons:
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Highlights excess outside cash flow available for business debt service. A well constructed guarantor cash flow statement will identify all sources of revenues and subtract all obligations leading hopefully to an excess figure that can be underwritten as a back-up source of repayment. If it is negative, that is key credit information right?
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Brings to light how much salary will be required from the business. Another key reason for doing a guarantor "global" cash flow analysis is it should clarify what personal obligations exist and if there is going to be pressure on the business to throw off a certain amount of cash in the form of owner draws or salary to service those obligations. People like to eat and keep the lights on, and sometimes at the expense of servicing their small business loans. Right?
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Serves as a "check and balance" to the credit bureau information. An expanded personal financial statement that asks for detailed personal income and obligations further illuminates the character of your borrower. Is there full disclosure? If not, you might want to reconsider the character/capabilities of your principals.
We understand there are no short term plans by SBA to update and expand the SBA Form 413 (although we think this would be a good idea). So in lieu of that fix, we recommend to lenders that you incorporate some sort of personal cash flow budget that gathers the income and obligations of the key guarantors. You can attach that personal cash flow budget to the Form 413 to get a more complete picture of the personal financial condition. Furthermore, as always, you are encouraged to specifically comment on the relevant issues in your credit memo. A crisp comment or two, tracking back to your cash flow form, or an asterisk on the Form 413 with a pertinent comment, is always a good idea. This approach clearly shows SBA that you understand the importance of global cash flow in the analysis of the business cash flow and new debt repayment analysis.
We at sbaAccess are continually developing new tools to make your job easier. Some of these tools are available for free on our website at www.sbaAccess.com and others are only available to Special Access subscribers. If you would like to explore ways that we can customize solutions for your needs, please give us a call at 972.301.4601.
Take the Right Approach
Karen McHugh and Brian Burke
SBA Access ©2009 - All Rights Reserved
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