April 26, 2017

Best Practices: Use of Proceeds Disbursement Considerations

by Janet M. Dery

One of the most important conditions in properly closing an SBA loan is making sure that the use of loan proceeds complies with the SBA Loan Authorization. It is the responsibility of the lender to ensure that proceeds are properly disbursed. If the Lender does not properly monitor all loan disbursements, a lender will be placing its guaranty at risk.

In a change of ownership transaction, lender should clearly identify the “seller,” the party who actually receives the sale proceeds. While the settlement statement may list an entity as the seller, it is not always the seller’s account that is listed on the seller disbursement instructions. If the instructions have the name of just one of the owners of the seller, then instructions for the actual selling entity’s account should be requested. If the request is refused, then it should be determined how the other owner(s) will be provided with their portion (s) of the sale price and written proof of same should be obtained.

More worrisome is when the instructions ask that sale proceeds be provided to seller’s counsel or a broker when such person is not acting as the disbursement agent. Since there is no way to insure that the sale proceeds will then be provided to the seller by such party, it would be in lender’s best interest not to agree to any closing where sale proceeds are being sent to anyone other than seller or seller’s owner(s).

A lender’s active role should also include the review of any payoff letters involved in the transaction. Besides checking for release of lien language to insure lender’s correct lien position, the lender should review to make sure they are from the parties who currently hold the debt that is being refinanced or paid off. If there are wiring instructions involved, then a lender should confirm that the account listed on the instructions is for that creditor. Additionally, due to recent scam activity involving new wiring instructions before a closing, the lender or disbursing party may want to confirm directly with the party which will receive the funds that the wiring instructions on the payoff letter are correct.

From closing, the lender should obtain from the disbursement agent copies of all disbursement checks and wires sent to confirm that the funds were actually disbursed to the intended recipients and destinations. This information should be immediately provided to the lender by the disbursement agent. Having this documentation also proves valuable to lenders when trying to provide evidence for lien releases to 3rd parties that existing liens were paid and satisfied.

If the facility is a multi-disbursement loan, such as a construction loan or a loan that will be multi-disbursed for future equipment purchases or working capital, the lender’s active role continues after the initial closing. For example, if the loan is a construction loan, the lender will either need to monitor all future construction related payments itself, most likely through an in-house construction department, or employ a construction monitoring firm to oversee and approve the future disbursements. All future disbursements must be documented in much the same way as the disbursements from the initial closing, including obtaining any invoices, receipts, draw requests, and other documentary evidence of the use of those loan proceeds.

While in many circumstances, another party is tasked with disbursing loan funds at closing, it is always in the lender’s best interest to be attentive and diligent in making sure the funds are disbursed in accordance with the SBA Loan Authorization and the SOP 50 10 5(I) in order to protect its guaranty.

For more information on disbursing in compliance with the SBA Loan Authorization, contact Janet at 267-470-1189 or at