Although businesses across the country have been affected by the COVID-19 pandemic, many lenders have recently shifted focus from making PPP loans to again making SBA 7(a) loans. Many lenders are financing construction projects, start-up businesses, real estate purchases and business acquisitions, but lenders should be mindful of adverse change considerations when extending these loans.
One of the certifications that SBA 7(a) borrowers are required to make at closing and again upon subsequent disbursements of loan proceeds is that there has been no unremedied adverse change in the borrower’s financial condition, organization, operations, or fixed assets since the date the loan application was signed. The reality is that many borrowers are experiencing or have recently experienced an adverse change in their financial condition due to temporary closures of businesses, social distancing requirements and sheltering-in-place requirements, especially considering many states which may have reduced restrictions in recent weeks are again increasing operational restrictions for businesses. SBA issued SBA Procedural Notice 5000-20011 with an effective date of March 26, 2020 which set forth guidance for lenders to make loans or continue to make disbursements to borrowers who have experienced an adverse change as a result of the COVID-19 pandemic:
- If the borrower (or proposed business being acquired) is fully operational, Lender must verify the borrower’s plan to remedy any adverse change as established by cash flow projections and proforma financial statements, among other things, before disbursing loan proceeds.
- If the borrower (or proposed business being acquired) is partially operational, lender must determine if the adverse change can be remedied. If lender determines that the adverse change can be remedied, it should verify borrower’s plans, including cash flow projections and proforma financial statements. If the lender determines that the adverse change is significant and cannot be remedied, lender should not close the loan or should withhold making additional disbursements if the loan already closed.
- If the borrower (or proposed business being acquired) is not operational, no disbursements should be made until the borrower (or business) begins to operate again and the borrower has demonstrated its plans to remedy any adverse changes.
In all cases, lenders must document their rationale for closing and disbursing new loans or continuing to make disbursements on existing loans in their portfolio. Lenders may want to consider building a COVID-19 adverse change analysis into their credit memorandums for all new loans to ensure that any potential adverse changes are addressed and fully documented. SBA Procedural Notice 5000-20011 is just as timely and important today as it was when it was issued in March. In the current economic times, with loan defaults rising, lenders must be extra vigilant to address any adverse changes experienced by its borrowers and to underwrite and disburse its SBA loans in a commercially reasonable and prudent manner. For questions regarding SBA 7(a) loan closings and disbursements, contact the attorneys at Starfield & Smith at 215-542-7070.