As we’re sure you recall, we discussed documenting equity injections in an article back in August of 2021. (Yes, that was a while ago. Here is the article.)
Today, we’re revisiting those points and providing an update based on what we’ve been seeing more recently.
Remember: correct documentation is essential for getting your SBA guarantee approved – and avoiding requirements for repair. Close attention is worth your time and effort!
Also, please note this important point: the upcoming SOP 50 10 7 and 50 57 3 are effective August 1, 2023, and yes, they will include changes to evidence of injection. But for all loans originating up through July 31, 2023, the current rules still apply.
That said – onward to the most common problems we’re seeing these days.
1. Out-of-pocket purchases subsequently reimbursed
If the borrower makes out-of-pocket business purchases, and those invoices are subsequently reimbursed to the borrower during loan funding, those funds are ineligible for equity injection.
2. Transfer of funds from an affiliate business
Any transfer of funds from an affiliate business to the borrower must be documented in a Note on Standby, or other proof must be provided that the funds were in fact transferred from the affiliate.
3. Adherence to the Form 1920 Credit Memo and Authorization
It’s surprising how easy it is to slip out of alignment with the terms of the Credit Memo and Authorization as to the documented source of the equity injection. Double-check yourself!
Updates to our previous article’s points
4. Insufficient or inaccurate bank statements
All bank statements provided must give a clear path from the first funding source through to when the funds were injected into the project. It must be possible to follow the trail as funds are transferred from one account to the next.
Additionally, be aware that the source of large deposits must be documented. You’ll see this defined in SOP 50 57 2 on page 151, section G.6.e (5).
5. Gift letters
Note that gift letters must include the amount of the gift, the donor’s name, and a statement that this is in fact a gift, with no expectation of repayment.
Any large deposits in the donor’s bank statements must be sourced.
6. Wire transfers
Include the two most recent months’ bank statements from which the funds were withdrawn, as well as the borrower’s bank statement into which the funds were deposited. This verifies the source of the funds and provides evidence that they were deposited.
7. Certified closing statement
SBA has been requesting the wire or cancelled check to verify the funds were injected into the project, as defined in the lender’s credit memo on form 1920 and in the Authorization.
8. Adherence to Authorization
SBA has indicated in Notice 5000-846991 that use of the Authorization would be eliminated. This was followed by Notice 5000-847482 regarding the use of SBA Authorization for 7a loans only, which changed the effective date to August 1, 2023, but – as mentioned above – any loans originating prior to that date must outline what’s expected. Variations from what was originally stated in the Authorization must be documented with a memo to file – and when required, must also be submitted to SBA for their review and approval.
Need some help with that?
We know these SBA notices and requirements can get sticky, to say the least. Fortunately, we love reading and understanding them (yes, really!). So we’d be glad to help you review your processes, provide training to make sure your staff knows what’s expected, as well as conducting portfolio loan reviews to ensure nothing’s lurking in the shadows waiting to cause problems. You can call us at 877.576.0819, or contact us through the form here. We look forward to helping you and your team!