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December 2, 2015

Best Practices: Yes, I Would Like a Printed Receipt

by Greg T. Kupniewski

Now that the holiday shopping season is in full swing, it is a good time for a reminder about receipts. Today’s retailers offer customers many options when it comes to receipts: paper copies, emails, texts, et cetera. As for SBA loans, the choice for lenders is much simpler: get one now.

The SBA requires lenders to obtain receipts for all equipment purchased with loan proceeds. The aggregate total of the equipment receipts should match the portion of the loan proceeds allocated to equipment purchase in the SBA Loan Authorization. In particular, SOP 50 10 (H) reads:

The lender must obtain evidence to support disbursements, such as cancelled checks or paid receipts, to ensure that the borrower used loan proceeds for purposes stated in the Authorization. If the Authorization identifies working capital as a use of proceeds and those proceeds will be used to pay normal operating expenses (e.g., payroll, utilities, etc.), then the working capital disbursement does not need to be documented.

While this concept is relatively straightforward, failure to abide by this requirement is one of the most common causes for a repair in the guaranty purchase process. A lender must submit copies of all equipment receipts as part of its guaranty purchase package (the so-called “10 Tab”) when an SBA loan goes into liquidation. When reviewing the 10 Tab, the SBA will tally all of the attached equipment receipts and compare the total to the equipment allocation in the SBA Loan Authorization. If there is any discrepancy, the SBA can easily and readily calculate the resulting repair.

For lenders, this type of repair is difficult to overcome and can be quite costly. Despite the risk, however, lenders regularly neglect to document equipment purchases properly. In the typical flurry of activity surrounding a loan closing, reconciling equipment receipts likely will not be the highest priority. But lenders don’t need a perfect reconciliation. Lenders only need an accurate pre-closing tally of the equipment receipts in hand. If there is a shortfall, lenders can fix the discrepancy by reallocating loan proceeds through a 327 action rather than chasing potentially non-existent equipment receipts.

There is also a hidden benefit to documenting equipment purchases. The equipment receipts ordinarily describe the equipment with a fair amount of specificity. When a lender performs its post-default site visit, it should have the borrower verify that all of the purchased equipment is still in the borrower’s possession. If the lender can identify missing equipment during a timely post-default site visit, the SBA likely will not repair its guaranty. If a lender learns that equipment is missing later in the process, a guaranty is likely.

Although it can be tedious and time consuming at closing, lenders should prioritize obtaining equipment receipts at the same level as other loan documentation. A modest investment of time at closing can save a lender significant money on liquidation.

For more information on documenting loan disbursements, please contact Greg at gkupniewski@starfieldsmith.com or at at (215) 390-1023.