SBA 7a loans from start to finish
What to expect when you’re expecting, to close
By Stephen Mariani
If you have been following along these last 10 months and reading our newsletter, then you know more than most on how to properly submit, get approved and even close an SBA 7a acquisition loan. What we haven’t talked about is bringing all these pieces together and being certain that each step was in line with the lenders policies along with the SBA rules we’ve outlined. In today’s letter we will walk you through a loan file from the first call all the way through closing and discussing many of the pitfalls that we see loan applications fall into.
The first “kiss of death” is when the buyer begins with “as much as I can get” when asked what amount of loan he is requesting. The message he sends to a potential lender is that he is not sure of the project, hasn’t compiled his project costs and does not have a structure in place for his success. Immediately the lender is concerned and begins to ask the harder questions to determine if this is just a lack of experience of a borrower they do not want to be in business with.
Typically the lender will then move on to items like experience, current income level and salary requirements to sustain the lifestyle he is accustomed to. Once he has an understanding of the overall project he will begin to evaluate the business. When a lender speaks directly to a borrower about an application he will be asking questions about the business aside from and in addition to the buyer questions. The red flag here is that the answers provided about his personal items may have been spot on but how much does he really know and understand this business? Typically he will send business questions to the broker or even the seller themselves. Most times this is fine except we need to keep in mind that the seller could possibly be feeling overwhelmed by the questions not only from the lender but also from the listing broker who had to determine a selling price and the buyer who is trying to understand the business. Many times we find ourselves adjusting the lender questions prior to sending them to the seller and broker for ease of understanding.
Determining the cash flow as presented to underwriting can be challenging at times and may need your assistance and attention. As I have explained many times in the past, the SDE and cash flow of a business as reported on tax returns may be two completely different numbers and someone has to find the happy and documentable middle ground for the lender. Be prepared to lose a few of the smaller items such as personal cell phones, payroll taxes, etc. as we have described in previous writings (and can spend another entire day discussing).
Two to five weeks later, the loan is approved and the file is moved into the closing process, what happens now? It typically begins with the closing checklist and many pages of items needed to close which is provided to the borrower. With 35 to 50 items to complete before funding it sometimes seems too much to get done within the next few weeks as the pressure from all parties now focuses on the buyer’s ability to complete the checklist. First and foremost, assist the buyer with breaking down the list into “responsible party” categories such as buyer attorney, seller attorney, buyer, Etc. and make the list more manageable. After assigning a name to each item, request an expected date and list that alongside the person responsible producing it. We are now well on our way to closing and organized.
The two most complicated items that should be addressed immediately after loan approval are the required life insurance on the borrower and the landlord lease. The life insurance can be time sensitive as many policies take weeks to be approved and assigned to the lender, be sure this is a priority for your borrower. The next item is also time sensitive as the landlord may not be easily accessible and you may wind up dealing with a management company in between. The typical items required will be a lease with a term equaling the loan term and a landlord waiver which waives the landlord rights to any assets in the building financed by the lender. This LL waiver is sometimes negotiated by the representative of the landlord and can take a few weeks to complete.
We’re all on track and moving toward the closing date but a few items still remain to be completed last minute. Some items such as “proof of cash injection” and wire transfer documents cannot be done until just days before the closing along with the settlement statement reviews and actual logistics. At this point having a single person assisting with the review and completion of these is critical and really help coordinate the final pieces.
Go close the transaction and complete the deal just a few days behind schedule but all parties are happy and you have been able to secure more money for the seller than anyone thought possible, this makes you’re the HERO.
Yes we have made this sound simpler than it actually turns out to be but what you can take to the bank at the end of the day is that you do become the hero in the deal and it became a win for all parties involved. I cannot answer for you but this helps me sleep at night.
AskDiamond@easysba.com is always available for specific questions regarding this or other SBA rules.