SBA Tip # 7
The “Liquidated Collateral Rules” and how they affect your loan request
By Stephen Mariani
If you have been following the rule changes and tips each month you will remember that last month we talked about securing borrowers collateral when available. This month we will walk you through how SBA lenders view the collateral included in the actual transaction.
What most borrowers and brokers alike don’t understand is that when presenting a deal and advertising the “Assets” included in the purchase price the lenders have a totally different understanding of asset values. Lenders typically view assets on a “Liquidated Collateral Value” amount which is much different. Most national lenders use DCV or Discounted Collateral Values to determine the collateral which equates to much less than book or actual values. Here is a sample of discounts applied to most assets included in typical transactions. Leasehold improvements are valued at 10% of reported values, FF&E are at 50% of FMV, inventory is typically 10% of current value and the big one that takes most people by surprise is the receivables, which are also discounted by 90% or considered at 10% value. Here is the thinking from the lenders point of view (supported by the SBA). If a lender should have to liquidate or foreclose on a business by the time they arrive the inventory would have been sold off (by the borrower), the receivables would have been collected (except for the longer, less collectable ones) and the FF&E will bring a lower value when sold at auction or under an orderly liquidation. We have excluded commercial real estate values by design as that carries its own values with variations.
So what’s changed and how does it affect us today?
The SBA SOP change regarding asset values seems to only affect “Equipment Values” on new equipment being purchased, which will now be valued at 75% of purchase price.
Why it is important to understand the above effects and how it can change a lenders interest in your loan. Although this information does not need to be explained to a potential buyer, it is important for anyone applying for an SBA loan to understand as it may greatly affect your lender prospects. When evaluating a loan for lender submission you should always understand what portion of the loan request will be unsecured or goodwill as this is how lenders regulate much of their internal policies. If a listing for $2million includes $1MM of assets it may sound like a very attractive loan. If that same deal is determined to have only 200M in assets, now it becomes 1.8MM in goodwill and you just lost the attention of 75% of the national lenders. It goes back to shopping a deal with the wrong lenders and how much time will it take to determine that it belongs elsewhere. Remembering, time kills all deals it is important to do the math, understand your loan request and present to the best suited lender for that particular transaction.
AskDiamond@easysba.com is always available for specific questions regarding this or other SBA rules.