As a general rule the lender must show the ability to repay the loan from the “cash flow” of the business. Cash Flow means earnings before interest, taxes, depreciation and amortization (EBITDA). The cash flow must be sufficient to cover total service including both the SBA loan and other debt.
The SOP now provides that the debt service coverage ratio must be 1.15:1 or greater “on a historical and/or projected basis” (emphasis added). Using “and/or” is somewhat ambiguous, although generally it should be taken to mean “or,” but caution should be used depending upon the circumstances as illustrated by the following hypotheticals:
1. Borrower does not have historical cash flow coverage, but has projected cash flow coverage. If the basis for the projections can be documented as required by the SOP, one would assume that “and/or” means “or” and you could just rely on the projections. Clarification from SBA would certainly be helpful.
2. Borrower has historical cash flow coverage, but does not have projected cash flow coverage. Prudent lending and reason would assume that you should read “and/or” to mean “and” and the loan wouldn’t qualify.
3. Borrower has historical cash flow coverage, but due to expansion and other growth related expenditures the projections do not show cash flow coverage for two years, but there is sufficient capital to cover the shortfall. SBA needs to clarify situations such as this and it may be safer to not use delegated authority.
Lenders would be well served to provide sufficient detail to clearly document their conclusions with respect to repayment ability given the Office of Inspector General’s propensity to find fault with lenders’ analyses (See Audit Report 13-16R, Audit Report 12-18, Audit Report 11-16).