What lenders need to know about the SBA’s renewed focus on the credit elsewhere analysis, and how to write more efficient analyses for the SBA loan approval process.
The credit elsewhere analysis is a required component of the SBA 7(a) loan credit memo and must pass the SBA’s standards to prevent timeline delays in obtaining SBA approval, avoid the possibility of SBA declining the application due to inadequate credit elsewhere analysis, or risking repair/denial of the loan guarantee.
This article explains the SBA’s current viewpoint on the credit elsewhere analysis and provides best practices for lenders in preparing credit memos with analyses that are more likely to gain SBA approval.
Purpose of the Credit Elsewhere Analysis for SBA Loan Credit Memos
The SBA’s credit elsewhere analysis requirement is intended to satisfy one of SBA’s primarily eligibility concepts for government supported programs based on access to funding through non-government guaranteed channels.
Full Requirements Detailed pgs. 131-132
Essentially, the analysis needs to confirm that all other possible sources of funding have been confirmed to be unavailable, justifying the need to obtain SBA-guaranteed financing.
Current State of the SBA: Heightened Scrutiny on the Credit Elsewhere Analysis
Due to the current lending environment, the SBA has heightened their scrutiny on the credit elsewhere analysis. Where lenders could once provide a blanket justification for the inability to find funding through other channels, it is now best practice to provide a more detailed analysis of specific factors and reasonable justifications of a borrower’s inability to obtain non-federally guaranteed business financing support.
Economic factors have prompted lenders to suggest the SBA 7(a) program to a different type of borrower than what we’ve observed historically. Simultaneously, the SBA continues to tighten their standards and enforcement of existing requirements in the current SOP, partly in response to the critique of their management of pandemic-related financing programs.
These interlinked factors are discussed in more detail below:
Economic Environment
Debt has become more expensive for borrowers as rates continue to rise, and the subsequent volatility continues to raise the concerns of credit risk teams. More lenders are pushing borrowers to leverage the SBA’s programs, which typically provide eligible loan maturities exceeding conventional lending maximums. Given the higher cost of borrowing in the current environment, the longer loan maturities allow debt service to feasibly be at a more appropriate level.
A New SBA 7(a) Applicant
Many lenders have adjusted their credit policies over the course of the ongoing rising interest rate environment. As a result, an applicant that may have qualified for a conventional loan might not meet new/updated lender credit policies. Our teams have observed higher levels of asset-heavy SBA loan program applicants. Without a comprehensive analysis of their available liquidity, including marketable securities but excluding assets held in retirement accounts, the applicant may appear on paper to be eligible for financing elsewhere based on SOP credit elsewhere analysis requirements.
SBA Scrutiny
The SBA is heavily invested in protecting their role as a supporter of small business and their crucial needs. The higher levels of scrutiny on credit eligibility are part of the aftermath of PPP and EIDL. As interest in SBA programs grow, the SBA is inclined to wield greater authority over the allocation of guaranteed funds to avoid guaranteeing loans to those businesses that may be able to obtain reasonable, non-government guaranteed financing elsewhere.
What to Include in The SBA Credit Elsewhere Analysis on SBA Loan Credit Memos
To satisfy the SBA’s standard, lenders must verify that credit is not available elsewhere from the liquidity of the applicant business itself or any 20%+ business owner, their spouse, and minor children, as well as conventional lenders or any other non-federal, non-state, or non-local source of funds. The analysis must substantiate why credit is not available elsewhere. This applies to all of the aforementioned possible sources of credit. For example, the analysis must identify a weakness in the credit, identifying why conventional financing cannot be offered by the lender. (lack of tangible collateral, loan term, industry, etc.)
A common mistake we observe is the failure to explain why more equity could not be injected to finance some or all of the project.
For example, the SBA does not consider investment holdings in a retirement account liquid. However, marketable securities, such as Amazon holdings in a standard investment account, are considered liquid by SBA standards. As a result, the analysis would need to detail why those liquid securities are not available and what imminent use(s) they are earmarked toward instead. In general, all liquid funds not being put into the project must be discussed in the credit elsewhere discussion to substantiate what purpose they are earmarked toward making them unavailable to be put into the SBA project. The narrative explanation and substantiation showing that credit is not available elsewhere is the critical piece that the SBA is looking to see within the lenders credit memo analysis and the #1 point of pushback that our team is seeing in loans reviewed through SBA’s LGPC.
Ideally, every credit memo would have a credit elsewhere analysis with a level of detail that is appropriate to the borrower’s amount of liquidity scaled to project size. The analysis would evaluate liquidity/credit options for:
- Liquidity of applicant business
- Liquidity of any 20% or more owner, their spouse, and minor children
- Any other potential non-federal, non-state and non-local sources of credit including conventional loans
This list is in accordance with the SBA’s most recent guidelines for credit elsewhere documentation, released April 7th, 2023. Download the full document here:
The Credit Elsewhere Analysis in 2023: On the Line for Lenders
An incomplete or incorrect credit elsewhere analysis significantly delays the loan approval process. This could also lead to repair or denial of the loan guarantee, inefficient closing timelines, and poor borrower/lender experience.
However, lenders that can consistently master the credit elsewhere analysis will:
- Streamline their loan underwriting and approval process
- Reduced risk of repair/denial
- Improve the borrower experience
- Implement more reliable processes and more efficiently manage customer expectations
By following the best practices outlined above, your lending team may reduce friction for all entities involved in SBA loan approval, maximizing efficiency while reducing risk and preparing for increased loan volumes in 2023.
Questions about best practices for the credit elsewhere analysis? Contact our SBA Loan Eligibility team using the form below.
About Windsor Advantage
Windsor Advantage provides banks, credit unions and CDFIs with a comprehensive outsourced SBA 7(a) and USDA lending platform.
Since 2010, Windsor has processed more than $2.8 billion in government guaranteed loans and currently services a portfolio in excess of $2 billion (as of December 31, 2021) for over 100 lender clients nationwide. With more than 150 years of cumulative SBA lending experience, cutting edge technology, rigid controls and consistent processes, Windsor is uniquely qualified to assist any size lender with implementing a thoughtful and profitable government guaranteed lending initiative.
The Company is headquartered in Chicago, IL with offices in Indianapolis, IN and Charleston, SC.