Documenting Equity Injection Right Part 2

If you missed our Part 1 article, you can find it here.

As we said there, equity injection is a common stumbling block for many SBA Lenders, causing problems with SBA loan reviews and SBA guaranty purchase requests.

Our Part 1 article covered the first three of five key steps to make sure you avoid those problems. As we stated there, ensuring your audit trail is accurate and complete is essential. That article covered (1) source of funds, (2) proof of contribution, and (3) contribution timing.

Now let’s look at steps four and five.

4. How were the funds used?

To be eligible as an equity injection, funds must be matched to specific project costs aligned with the loan’s approved Sources & Uses. This can be proven with:

• Invoices and paid receipts

• Construction draw reports

• Settlement statements

CPA-prepared Sources & Uses schedules for more complex projects

5. Is the equity fully at risk?

To qualify as equity, the injection

• Must not be borrowed (unless explicitly allowed by the relevant SBA SOP)

• May not have repayment terms

• Cannot be supported by side agreements

When a seller note is used for equity credit, it must

• Be on full standby for the entire term of the loan

• And be properly documented in the loan file

Improper documentation or structure of a standby seller note is a magnet for SBA citations.

Common documentation gaps

Looking at these five steps, you can easily see where the gaps typically show up.

• No clear audit trail from source to use

• Deposits without explanations

• Expenditures claimed as equity – but missing receipts

• Seller notes counted as equity without full documentation

• Inconsistencies in Sources & Uses schedules

Each of these is preventable by following the best practices we outline here.

Final thoughts

Bear in mind that the credit memo’s opening narrative – you might think of it as an “executive summary” – is what SBA reviewers look at first. If it’s concise and complete, you’ll be off to an excellent start – especially since it should include a brief review of each of the documentation requirements as we’ve described.  

Need some help? That’s what we’re here for! We can review your current loan processes to ensure equity injection is being documented properly, conduct an SBA loan review for your existing loans to catch any gaps in documentation, your checklists and procedures to make sure your team is following the necessary steps.  And of course, we offer SBA lender training to bring your team up to speed or provide a refresher, as well as SBA consulting services for those tricky equity injection gray areas where you just need a second opinion. In fact, training is a great way to start your SBA Lending team off to a great start.

Give us a call at 877-576-0819, or drop us a note here.