As the various pandemic-related government aid programs wind down (PPP, Restaurant Aid, Venue Operators Assistance, etc.), the SBA is expecting that borrowers will not be able to pay their loans and bank portfolios will not look as healthy as when they had the programs as support. In order to offset these impending defaults, the SBA has rolled out new guidelines for lenders while cautioning that current or new deals need to have cash flow and a strong ability to repay. Additionally, the SBA are getting the funding necessary to monitor and assess lenders who are not abiding by their rules and guidelines. In January of 2021, the SBA also issued a notice modifying the 7(a) loan program in light of the just-passed Economic Aid Act. This modification temporarily increases guarantee percentages (to up to 90%).
Between the guarantee percentage going back to its normal ranges in September and the current winding down of all the crisis funding, the SBA is already gearing up to address some of its effects. The SBA acknowledges that there will be more defaults in their portfolio due to the temporary guarantee hike and the aid, in anticipation of these defaults the SBA is communicating these guidelines and warnings to lenders:
- Lenders should consider current and future effects of the emergency on business operations, cash flow and repayment ability.
- Lenders’ failure to underwrite, service, and liquidate SBA loans in a commercially reasonable and prudent manner may result in the suspension or revocation of the authority of a lender to conduct 7(a) program activities in accordance with the regulations.
- If the Lender’s financial analysis demonstrates that the applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available or outside the sources of repayment.
- For any loans where 50% or more of the loan proceeds will ve used for working capital, the lender must specifically address in its credit memorandum why this level of working capital is necessary and appropriate for the business in light of the COVID-19 emergency.
What does this all mean for franchisors? The uncertainty brought by the pandemic is still playing itself out in the lending community. Get ready for more hurdles, time to receive financing will be longer, lenders will be asking to see proof of how you dealt with the pandemic and future plans for growth.
We are constantly monitoring changes in the franchise lending landscape. Contact us if you have more questions by emailing firstname.lastname@example.org.