Business loans are different from consumer loans in many ways, and not least in the very purpose of the financing.
A company borrows money for specific business purposes designed to produce specific ROI through specific activities funded by the loan.
That means every business loan is intricately connected to a lot of moving parts within the company that’s borrowing the money: issues such as resource timing, integration, and coordination.
And even though the SBA’s mission is to help small businesses, those same small businesses sometimes can’t help themselves during the application and submission process. Because they don’t understand the requirements, they oftentimes bungle their application.
In-house loan officers can’t always spot an SBA-specific problem (especially if they’re fair-weather SBA lenders who only occasionally engage in the process).
That can trigger a “screen out,” which is an official communication containing questions from the SBA specialist reviewing the application.
Screen outs can cause delays, which can be detrimental to the business purpose of the loan. They can also cause frustration for both lender and customer.
One of the ways qualified, experienced Lender Service Providers (LSPs) are worth their weight in gold is in their ability to pre-screen for screen outs.
Understanding is the first step to avoiding screen outs and their toxic effects on relationships, confidence, and closing timelines.
The Top 5 Reasons for Screen Outs
The number one cause for screen outs on SBA 7(a) applications in fiscal 2017? Incomplete or missing financial statements.
The right LSP operates from a series of checklists, the first of which deals with historical statements, projections, PFS, debt schedules, etc. to ensure that before anything is sent to the SBA, all financial data is complete and in order.
The second top reason is problems with the Credit Memo. A good memo (i.e., a complete memo) will address and itemize loan proceeds, equity and seller financing. It will also list applicable terms and uses, and describe collateral in language and substance consistent with SBA requirements and rates (including life insurance where applicable).
A complete memo is also comprehensive with regards to SBA-specific information: credit topics such as assumptions and guarantor experience, credit elsewhere, IRS transcripts verification and shareholder debt. Here at Bank Solutions, our software solutions ensure that the credit memorandum is written to include all the critical keywords SBA underwriters look for.
The next three screen out reasons are of lesser percentage:
3) debt refinance sloppiness, 4) problems with SBA forms 1919 and 1920, and 5) ownership change issues.
Scrutiny pays big dividends in dealing with debt refinance details and how they comport, comply and conform to SBA rules and requirements. It’s not hard necessarily, but it requires attention to detail and experienced LSPs know where the most likely pitfalls occur.
Effective LSPs use advanced software to assist with many aspects of SBA compliance, which includes the submission of complete, signed forms 1919 or 1920. One in 12 applications gets screened out for glitches on those forms.
Finally, the right LSP partner double- and triple-checks company ownership files to make sure that eligibility is confirmed and all documentation (valuations, agreements, etc.) are complete and acceptable.
At Bank Solutions, for example, we have career CPAs and other financial professionals on staff to ensure that financial statements, credit memos and ownership documents are all compliant with SBA guidelines and requirements.
Managing screen outs on the front end allows SBA loans to perform with the speed and proficiency necessary to serve a robust commercial lending clientele well.
The secret: it’s who you know — and what they know about stopping screen outs before they start.
SBA lending is highly profitable for many banks. But it must be efficient first.
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