Value furniture and fixtures based on the net book value or by the invoice amount if the items are purchased with the loan proceeds. Any equipment with a value of $5,000 or more will need to list the serial number or other identifying information. Last, if the loan’s use of proceeds is used to purchase Machinery and Equipment, the collateral value can be based on the invoice or bill of sale. The lender also has the option to obtain an equipment appraisal and use the Orderly Liquidation Value (OLV). The collateral analysis can use the net book value (gross value less depreciation) from the balance sheet. There are three ways to value Machinery and Equipment. If renovations will be made to the property, use an “as complete” value in the collateral analysis. For example, the Furniture, Fixtures, and Equipment (FF&E) will need to be valued separately from the property itself. Some special use property will require other appraisal requirements. Value all Commercial Real Estate taken as collateral based on an appraisal.
The following assets need to be valued based on appraisals, invoices, and/or net book values. Failure to address the SBA’s criteria in addition to internal standards can cause confusion for borrowers, frustration for lending teams, and shortfalls that could delay the loan’s timeline.īelow are some elements of the collateral section of the credit memo that are commonly omitted or incorrectly documented: Correctly Value Borrower Assets Using the SBA’s Collateral Discount Ratesįirst, review that the borrower’s assets are properly valued. The SBA has specific collateral documentation requirements for their loan programs that may differ from internal lenders’ policies. You may document this information in the way your institution sees fit, but it is common to see ‘Credit Not Available Elsewhere’ in checklist form, or a yes/no question-and-answer format. Any other factors relating to the particular credit that cannot be overcome except for with the SBA Guaranty.Loan amount exceeding the amount the lender could offer conventionally.Business requiring a longer loan maturity than the lender’s policy would allow for conventionally.Substantiate that credit is not available elsewhere by discussing acceptable factors that demonstrate an identifiable weakness in the credit, such as:.All other non-federal, non-state, or non-local government sources of credit.Liquidity of owners, as well as their spouses or minor children, of 20% or more of the business.Some or all the loan amount is not available from any of the following sources:.The SBA requires borrowers to prove that they have not been able to secure financing through conventional means in order to qualify for an SBA 7(a) loan. These elements that every SBA credit memo must include are… Other items may only be applicable to SBA 7(a) loans. Some items are common on all credit memos whether it is for a conventional or SBA loan, like the Business History, Borrower and Guarantor Summary, and Credit History. Key Elements of a Credit Memo:Ī complete credit memo details a comprehensive picture of the borrower’s credit worthiness. Below we highlight some of the most important items to include on SBA credit memos, as well as the most commonly omitted items. Streamlining the loan application process starts with understanding what the SBA is looking for in their credit memo standards. These credit memos are heavily scrutinized by the SBA throughout the approval process or in the event of a borrower default.
The SBA has strict criteria for credit memos that are put together for SBA 7(a) loans. Not only can incomplete credit memos lead to frustrations for the borrower, they can in some cases even lead to a repair or denial of the guaranty from the SBA. If any of these elements are missing, the story will be incomplete which can lead to the loan being delayed or denied. Just as any good storyteller does, the lender creating the credit memo must include specific elements that help paint the picture of why the borrower should be approved for a loan. This story is then evaluated by the bank and the SBA to determine whether the loan will be approved or denied. Credit memos are critical to a loan application as they help tell the story of a borrower, their business and how the loan will be used.