Going forward, in analyzing the repayment ability of the applicant, the lender must obtain historical financial statements and tax returns (if an existing business) and detailed projections.  The analysis of these documents must support the following assumptions, which are listed, and in some cases further detailed) on pages 163-164 of the revised SOP:

1. Analysis of historical cash flow should demonstrate total debt service coverage after the SBA loan;
2. Define operating case flow (OCF) as earnings before interest, taxes, depreciation and amortization (EBITDA);
3. Analysis must document additions and subtractions to cash flow;
4. Debt service (DS) is defined as required principal and interest payments on all business debt inclusive of new SBA loan proceeds.  The small business, applicant's debt service coverage ratio (OCF/DS) must be 1.15 to 1 or greater on a historical and/or projected basis;
5. Spread of pro-forma Business Balance Sheet (current business balance sheet + changes in assets and liabilities as a result of the loan, other debt, any required equity injection, and use of proceeds);
6. Ratio calculations (cased on the pro-forma Balance Sheet and historical and projected Income Statements) for the following financial ration benchmarks:  Current Ration, Debt/Tangible Net Worth, Debt Service Coverage, and other rations the lender considers significant for the business/industry (e.g. inventory turnover, receivables turnover, and payables turnovers, etc.);
7. Analysis of working capital adequacy to support projected sales growth in the next 12 months.

Item 4 of the above assumptions represents the first time that the SBA has ever stated a specific required minimum debt service coverage ratio for 7a loans.  However, due to the use inclusion of "and/or" in the language, it is unclear how this requirement is to be implemented.  When is "and" applicable, and when is "or" applicable?  Obviously, a projected basis only can be used when dealing with a startup.  The complication arises when the applicant is an established business.  Is the loan eligible if the debt service coverage ratio on historical basis meets the SBA required ratio, but isn't met on a projected basis?  What if it is not met on a historical basis, but is met on a projected basis?  At this time, the answer is unknown.  It is hoped that the SBA will provide further clarification on this issue before the January 1, 2014 effective date.

For more information on the required financial analysis for loans over $350,000, please contact Janet at 267.470.1189 or jdery@starfieldsmith.com.