 | Tip of the Week Tell the Story
Not surprisingly, we look at a lot of SBA loans in the normal course of our work with clients. We do on-site and off-site file reviews to help lenders prepare for their SBA audit, or to help them deal with portfolio and efficiency concerns. We can also help clients with due diligence if they’re thinking about buying or selling a portfolio. We use SBA’s 43 point compliance checklist that is quite thorough (we’re often told we tend to go deeper than their bank examiners, SBA reviewers and internal loan review). But we don’t take an auditors approach to these reviews. We take a partner approach. The difference is, we don’t play “gotcha” and we work hard at not throwing anyone “under the bus”. We approach our work as a learning process. Together, if we can learn how to do something different or better on a particular loan file, that can transfer into process innovation. With that insight, a possible new approach can be used that should result in better portfolio quality and higher efficiency. This week, we’d like to share a key approach that we’ve picked up through almost every file review project we’ve been involved with. It can be boiled down to this simple lesson: tell the story! SBA lending (both 7(a) and 504) has often been referred to as “story lending”. While credit scoring and formulas have their place in our business as a critical assist in the decision process, telling the story of the loan is too often a missing art form in our business. And yes, because of the marvelous structural elements of our government guaranteed lending products, we should help borrowers get those harder to do deals done, even in this tough environment. At a minimum, there are five components to a credit analysis (the story of the loan) that need to be appropriately explained in the loan officer’s memorandum or credit write-up for both 504 and 7(a) loans. - Tell the story of the deal. Describe the business transaction and the effect of the loan on the business. Is it a start-up, an expansion, a franchise business, a business acquisition etc? You’d be surprised how hard we sometimes have to dig just to discover the basics of the deal. Save yourself and your reader the headache of wondering – just tell it like it is, right up front.
- Tell the story of the people involved. This is your analysis of management ability which should include a description of the relevant background and qualifications of the principals involved in the day to day management of the business going forward. Identify gaps and risks and mitigate them. These same folks will likely guarantee the loan, so be prepared to speak to their personal financial support of the loan (either here or later in your write-up).
- Tell the story of the numbers. This is your financial analysis of the proposed loan transaction. Focus on key elements of the loan:
- Use of proceeds – the story about how the money will be used (must be for a “business purpose”)
- Repayment – the story of how the loan will be repaid in an orderly and timely fashion through business cash flow and backup sources
- Condition – the story of how the loan impacts the borrower, plus/minus
- Tell the collateral story. This is your description of the security taken for the loan and the secondary source of repayment. Make sure the 7(a) loan is “fully secured’ based on liquidation values. If construction is involved, tell that story too (every construction project has a story, so be prepared to discuss mitigation of those risks).
- Tell the eligibility story. A good SBA loan write-up has a complete section on eligibility and program compliance. Beware of “cut and paste” boilerplate language here. Make sure that the story makes sense and is relevant to the rest of the specific deal. So for example, when explaining why the loan meets the “credit elsewhere” requirement, provide a meaningful reason, not something off the shelf (e.g., debt to worth – especially if it’s not a debt to worth issue). We have comprehensive job aids and tools that we’ve created to help our clients catch all the necessary elements for this and all other elements of a healthy write-up.
When we say “tell the story”, we’re NOT suggesting that you weave a yarn, use big words or try to wax eloquently on the subject. Quite to the contrary, we urge that you use small words, short sentences (bullets can be very effective in helping the reader focus on key points). Always back your statements up with facts. This is an important business document and it is the rationale behind the loan making. Tell the story and keep it as crisp as possible. In the end, it’ll be easier for you by having a system and template that works well for each loan you do. Also, it will be easier and better for your readers – your committee, your auditors, and if necessary, your SBA guaranty purchase officers. We certainly hope that each story has a happy ending! Take the right approach. Brian Burke and Karen McHugh | |
