WHEDA reviews nine criteria when it underwrites an application. These criteria make the underwriting process more objective and predictable for both WHEDA and Lenders. A Quick Reference to Underwriting Guidelines is outlined at the end of this chapter.
The Borrower does not need to meet each criterion's minimum guideline to participate in the Guarantee Loan Funds. If some of the criteria do not meet established guidelines, but can be offset or mitigated to reduce the loan's risk, the request can still be approved. In many cases, the applicant will not meet each criterion's minimum guideline.
For startup businesses, the guidelines are different for owner's equity, market, management and business tenure than they are for existing businesses. Refer to the appropriate guidelines below.
The ratio between net operating cash flow and proforma debt service. Net operating cash flow is defined as net sales minus cost of goods sold and cash operating expenses (excluding interest expense). Proforma debt service includes the principal and interest payments on all term debt.
Guideline: |
The minimum projected debt service coverage is 1.2x based on all the Borrower's debt as an average over two years where no single year is below 1.0x. If the ratio is less than 1.0x the guarantee request will not be approved. |
The ratio of net available collateral after applying standard liquidation factors and subtracting liens to the amount of the proposed loan. Standard liquidation factors can be found in the collateral table in the Loan Guarantee Application. This ratio must also be calculated using the collateral's estimated market value.
Guideline: |
This criteria's minimum guideline is 110% using estimated market values and 80% using standard liquidation factors. The value of any personal assets securing a personal guarantee can be included when calculating coverage. |
Refer to the individual product chapter to determine specific eligibility requirements.
Guideline: |
The Borrower must meet all eligibility requirements. |
The amount of cash or non-cash contribution made by the owner to the project.
Guideline for Existing Businesses: |
The guideline is for a cash or non-cash contribution of no less than 10%. Non-cash equity may include items such as land, equipment, or complete standby debt. Cash contributions may also be in the form of gifts or Home equity loans. |
Guideline for Startup Businesses: |
The guideline is for a cash contribution of no less than 15%. |
The ratio of all business term debt to business net worth. All intangible assets should be subtracted from net worth.
Guideline: |
The debt to tangible net worth ratio must not exceed 4:1 unless the Borrower operates in an industry where the average ratio is higher than 4:1. Sole proprietorships only exclude any personal, non-business-related debt in the calculation. WHEDA focuses on business debt when it reviews this criterion. Personal debt will be evaluated as part of the management review. |
The ratio of current assets to current liabilities.
Guideline: |
The established guideline is for a ratio of at least 1:1 unless the Borrower operates in an industry where the average ratio is less than 1:1. All proforma working capital must be included when calculating this ratio. Current liabilities must only include items that are due within 12 months. |
Where the Borrower's product or service is sold and to whom it is sold.
Guideline for Existing Businesses: |
The Borrower must be able to show that a market exists for the products offered and that they operate in a stable industry. The Borrower's competition must be identified and the Borrower must discuss how it will differentiate itself from competitors. |
Guideline for Startup Businesses: |
The Borrower must be able to show that a market exists for the products offered based upon a detailed market analysis. The Borrower's competition must be identified and the Borrower must discuss how it will differentiate itself from competitors. The market analysis should provide written documentation and support for the Borrower's claims, which may be identified in the Borrower's business plan. Examples of written documentation may include surveys, questionnaires, letters of support from community officials, traffic count studies, demographic and statistical data. Attach the portion of the business plan pertaining to the market, if appropriate. |
The key individuals or officers that execute the business plan.
Guideline for Existing Businesses: |
The proposed or existing management team must have a minimum two years of experience in the field they are/will be operating in or they must be able to show that other work experience has prepared them to be successful in their business. |
Guideline for Startup Businesses: |
The proposed management team must have a minimum two years of management level experience in the industry that the Borrower wishes to pursue (Example: a retail shoe store manager decides to open a retail floral shop). |
The length of time the business has operated.
Guideline for Existing Businesses: |
When the loan guarantee request involves the purchase of an existing business, the acquired business must have been in operation for at least one full fiscal year (twelve months). If the Borrower is an existing business, it must be able to show satisfactory historical financial performance. Satisfactory performance means that the company can show steady growing revenues and profitability, and an ability to service its existing and proposed debt. If the Borrower's performance has not been satisfactory, a detailed explanation must be included in the credit analysis. |
Guideline for Startup Businesses: |
Not applicable for startup businesses. |
Quick Reference to Credit Guidelines
WHEDA Small Business Guarantee and Agribusiness Guarantee
Criteria |
Guideline |
Debt Service Coverage |
Minimum projected debt service coverage of 1.2x based on all the Borrower's debt as an average over two years and where no single year is below 1.0x. |
Collateral Coverage |
Minimum collateral coverage of 110% using estimated market values. Minimum collateral coverage of 80% using standard liquidation values. |
Mission |
The project meets the minimum eligibility requirements of the program. |
Owner's Equity |
For Existing Businesses: Cash or non-cash equivalent equity of no less than 10% of total project costs. For Startup Businesses: Cash equity of no less than 15% of total project costs. |
Leverage (Debt/Worth) |
Debt to tangible net worth ratio of 4:1 or less. The acceptable ratio may vary based on published RMA (Robert Morris Associates) median industry standards. |
Liquidity (Current Ratio) |
Current ratio of 1:1 or better. The acceptable ratio may vary based on published RMA median industry standards. |
Market |
For Existing Businesses: The Borrower is in an industry experiencing stable trends and/or the Borrower has a favorable competitive position and there is demonstrated market demand for the Borrower's product or service. For Startup Businesses: The proposed business will have a favorable competitive position and can demonstrate market demand for the Borrower's product or service based upon a detailed written market analysis. |
Management |
For Existing Businesses: Management has a minimum of two years experience in related business ventures. For Startup Businesses: Management has a minimum of two years management level experience in the industry that Borrower wishes to pursue. |
Business Tenure |
For Existing Businesses: a) The business has been in operation for at least one full fiscal year. b) The business can document satisfactory historical performance. For Startup Businesses: Not applicable |
