Credit Elsewhere - Not Just Checking a Box
One of the core benefits of the SBA guaranteed loan program is its ability to encourage lending to small businesses that cannot obtain conventional financing at reasonable terms. At NAGGL's recent SBA Lending Technical Conference in Indianapolis, one of the hotter topics discussed was determining if "Credit Elsewhere" was reasonably available to certain applicants. The SOP states
Acceptable factors that demonstrate an identifiable weakness in the credit or exceed policy limits of the lender include, among others:
The business needs a longer maturity than the lender’s policy permits;
The requested loan exceeds the lender’s policy limit regarding the amount that it can lend to one customer;
The collateral does not meet the lender’s policy requirements;
The lender’s policy normally does not allow loans to new businesses or businesses in the applicant’s industry; and/or
Any other factors relating to the credit that, in the lender’s opinion, cannot be overcome except for the guaranty. These other factors must be specifically documented in the loan file.
For years lenders have had canned language in their credit memos that state one of those items above, but the SBA warns that you need to provide more information and more scrutiny. You need to support that a borrower needs a 10 year term on working capital or that fully secured commercial real estate financing is not otherwise available and that the business needs a 25 year term. This may be especially difficult if you have debt service ratios above 2.0x, but they debt service at 1.5x with term that is available under your conventional policy.
It is important for lenders to look at your conventional bank policy and make any clarifications as to what your requirements and terms are in regards to single-use or special purpose property, start-up financing and special “high-risk” industries. We have not seen any push back from the SBA on loans submitted under Standard Processing thus far, but we will keep you posted if we do or if this increased interest in Credit Elsewhere will show up in lender’s PARRiS reviews.