Updated 12:00 pm January 1, 2012

The SBA releases new SOP 50-10 loan underwriting manual

Effective on October 1, 2011, the new SBA loan underwriting manual has changed the criteria that all banks must use to approve or deny an SBA loan request. This latest revision made a number of significant changes to the SOP, including those affecting EPC-OC transactions, the refinancing of existing debt in the personal name of business owners, and change of ownership transactions, to name a few.

The SBA also changed its policy on debt refinancing. SBA added the limitation that "SBA guaranteed loan proceeds may not be used to refinance debt in the personal name of the owners, with the limited exception ... for credit card debt in the personal name used for business purposes." SOP 50 10 5(D), page 132. Thus, whereas existing debt in the personal name of the business owners, such as a home equity loan whose proceeds were used for business purposes, was previously eligible for refinancing with an SBA loan, such refinancing would now be ineligible. As this appears to be a "straight line" rule without exception for any type of debt other than eligible credit card debt, and lenders must undertake a careful examination not just of the nature of the debt proposed to be refinanced (i.e., whether the proceeds were used for business purposes), but also the names in which the debt was incurred. Additionally, implicit in this new rule is that SBA lenders will be required to prove that debt refinanced in individual names (such as sole proprietor and individual EPC debt) was incurred for business purposes. This may be an impossible standard for lenders to meet in certain circumstances, as documentation of the business purpose of a loan may not be readily available.

While in SOP 50 10 5(C) the SBA amended the change in ownership provisions to require that the business be the borrower when loan proceeds were to be used for a change of ownership, with the apparent intent that such provision be interpreted to require that stock transfers be structured to require the business to redeem the entity's stock (rather than a direct transfer of stock from a seller to a buyer), the SBA has now added an express provision requiring such a transaction to be structured as a redemption:

"The Small Business Applicant is acquiring 100% of the ownership interest of one or more exiting owners. When a change of ownership is between existing owners, this must be accomplished through redemption of stock by the corporation or through the purchase of a partner's interest by the partnership. A partner, shareholder, or an unrelated third party may not use SBA-guaranteed loan proceeds to purchase an existing owner's interest in the business." (emphasis added)

The requirement that a change of ownership be structured as a redemption may have significant tax consequences (such as lack of basis in the shares issued to the new owners, etc.). This policy also removes stock purchase as an option to convey a business, leaving asset purchase as the only eligible option for SBA financing. In addition, this change leaves open the question of whether the redeemed stock/interests may be re-distributed to the owners of the business and if distributed for nominal consideration, what tax implications this will have on the new owners of the stock. Because of the implications this policy has on parties' ability to structure transactions and the potentially adverse tax consequences, this policy will likely be the subject of further discussion, interpretation and refinement.

SOP 50 10 5(C) previously provided that "[a]n EPC must use loan proceeds to acquire or lease, and/or improve or renovate real or personal property (including eligible refinancing) that it leases to one or more Operating Companies (OC) for conducting the OC's business." SOP 50 10 5(D) adds to this language the following prohibition: "An EPC may not use loan proceeds to acquire a business, acquire stock in a business or any intangible assets of a business or to refinance debt that was incurred for those purposes." SOP 50 10 5(D), pages 124-125. SBA has indicated that this change is intended to restrict the use of proceeds in an EPC/OC transaction to those uses that are eligible for an EPC, plus working capital and the acquisition of fixed assets by the OC. This interpretation raises a dilemma for lenders: how should a change of ownership be processed if the Borrower wants to split out the ownership of the business real estate to an EPC? The new clarification of SBA's position on this issue equates being an "obligor" on the note, with "use" of the loan proceeds, an interpretation that was not widely held by lenders previously. This new policy interpretation will require lenders to split business acquisitions that include EPC owned real estate into two loans, increasing costs to both the borrower and the lender, with little or no additional protection to the agency. Additionally, Lenders should be mindful that if the value of intangible assets exceeds $500,000, the borrower must inject 25% of the entire project (including business purchase and real estate) to process the loan PLP.

Contact the office at 800-803-0013 for any questions related to these or any underwriting questions.

Updated 5:00 p.m. PT, Wednesday Oct. 20, 2010

Congress and the President approve HR5297 - The Business Funding and Jobs Bill

Congress and President Obama finally did the right thing for small business owners. They passed the Small Business Jobs and Credit Act. The easier access to funding is just one of the many provisions that can benefit your business. If currently own your own business, are thinking of starting up or buying a business, if you have business debt that needs to be refinanced or would like to own your own building….there are provisions in this bill that can provide you with immediate benefits:

1. No fees on Small Business Administration (SBA) loans – If you borrow $500,000 under the SBA program for working capital, inventory, equipment or to cover other business expenses you have to pay roughly 3% of the guaranteed portion (in this example $13,500), under this new provision that government has reduced the fee to zero ($0.00) Benefit – You can save thousands of dollars by applying now for SBA business financing.
2. Increases the maximum SBA loan size – The SBA 7a loan program has been increased from $2 million to $5 million. The SBA 504 program has been increased to cover project costs up to $10 million. Benefit - This helps many midsize businesses that need larger loan amounts to either buy commercial property, refinance debt or to buy capital equipment to expand their business.
3. The guaranty percentage has been increased to 90% - SBA loans issued under the 7a program are now 90% government guaranteed. For example if you borrow $1,000,000 under the 7a program the SBA guarantees $900,000 of the loan against loss to the bank. Benefit – This provision is making a little easier to qualify for new business loans.
4. $30 Billion fund available to small community banks for small business lending – This is to help small, regional banks (assets less than $3 billion) increase lending to small businesses. Benefit – You now have more choices to access business loans, just because you have been turned down by a large commercial bank doesn’t mean you can’t get a loan.
5. Increase in the definition of a small business – As of October 1^st 2010 a small business is defined as a business that has less than $5 million of net income averaged over the last 2 years and less than $15 million in net assets. Under these new guidelines there are more than 35 million small businesses in the United States and the territories that are now eligible to receive funding. Benefit – The program is not just for mom and pop business, the SBA program has been redesigned to help small and midsize businesses access federal funding.

Call us today to receive your SBA Eligibility Consultation (800) 803-0013

Obama to unveil plan to help small businesses
Program includes $730 million to reduce small-business lending fees

updated 7:26 a.m. PT, Sun., March. 15, 2009
WASHINGTON - Amid misgivings over his spending blueprint, President Barack Obama has decided to provide billions of dollars in federal lending aid aimed at struggling small business owners.

The broad package of measures to be announced Monday includes $730 million from the stimulus plan that will immediately reduce small-business lending fees and increase the government guarantee on some Small Business Administration loans to 90 percent. The government also will take aggressive steps to boost bank liquidity with more than $10 billion aimed at unfreezing the secondary credit market, according to officials briefed on the plan who demanded anonymity to avoid pre-empting the president's announcement.

"It's a huge step in the right direction," Giovanni Coratolo, director of Small Business Policy at the U.S. Chamber of Commerce, said Saturday. "In this economy, having the least amount of risk for banks will incentivize banks to lend to small businesses. A lot of small businesses will benefit from this.


SENATE: SBA Provisions of Conference Stimulus Bill
Committee on Small Business and Entrepreneurship
February 13, 2009
SBA PROVISIONS OF CONFERENCED STIMULUS BILL


Background: The conferenced stimulus bill appropriates $730 million to improve existing SBA programs and create new initiatives that will address the current economic crisis. Below is a brief description of the most significant provisions.

Temporary SBA Fee Relief: As a result of the financial crisis and the recession, small business lending in the SBA's flagship loan programs -- 7(a) and 504 programs -- is in a freefall. The bill allocates $375 million to allow for temporary waivers or reductions in the fees the SBA charges to lenders and borrowers in the 7(a) and 504 loan programs. When determining the amount and structure of the waivers/reductions, the bill requires the SBA to give borrowers and smaller banks priority in receiving fee relief.

Temporary Increase in SBA Guarantee Levels: The bill allows the SBA to on -- a case by case basis -- temporarily raise the guarantee level (up to 90%) for 7(a) loans, other than loans made through the SBA Express program. Currently, the maximum guarantee levels are 75% for loans over $150,000, and 85% for loans of $150,000 or less. The increased guarantee will provide a higher level of protection for risk-weary small business lenders who have tightened their lending standards considerably in the wake of the credit crunch.

Business Stabilization Program: The bill will also help banks provide relatively small, short-term loans to small business borrowers experiencing immediate financial hardship. Specifically, the new program will temporarily allow the SBA to (i) fully guarantee "bridge-like" loans that cannot exceed $35,000, and (ii) fully subsidize a small business borrower's interest payments on the bridge loan. A borrower does not have to begin repaying the bridge loan until 12 months after receiving it, and the loan must be paid in full within 5 years. [Note: This was a House proposal. Although we helped formulate it, and we believe it addresses a significant problem for many small business borrowers, the program may not be structured in a way that will allow it to achieve its intended purpose.]

Microloans: The bill appropriates $30 million for the SBA's microloan program, with $24 million dedicated to microloan technical assistance, and $6 million for new microloans. By way of background, the microloan program provides very small loans to qualifying micro-businesses (typically businesses with less than 10 employees) by making funds available to non-profit, community-based lenders -- called intermediaries -- which, in turn, make loans to eligible micro-borrowers in amounts up to $35,000. Borrowers are also provided with corresponding technical assistance to ensure that the loan proceeds are used effectively.

SBA Secondary Market Stimulus: Many SBA lenders -- in both the 504 and 7(a) programs -- rely on a secondary market for SBA loans. These lenders sell a portion of the SBA loans they have already made to broker-dealers. The sales provide lenders with an important funding stream that allows them to extend additional SBA loans. The broker-dealers, in turn, pool the loans and sell them to investors in the secondary market. In the wake of the subprime mortgage crisis, the secondary markets for SBA loans have frozen. To thaw the 7(a) secondary market, the bill permits the SBA to make loans to broker-dealers. These loans would then be used by the broker-dealers to finance the purchase of additional SBA loans from banks. Another provision in the bill will help unfreeze the secondary market for "first lien" loans in the 504 program by guaranteeing pools of these loans, thus making them more attractive to risk-averse investors who have essentially abandoned all mortgage-backed securities.

Small Business Venture Capital Stimulus: The bill attempts to stimulate the flow of venture capital in the SBA's Small Business Investment Company (SBIC) program by simplifying the formula used to determine the maximum amount of SBA financing (a/k/a "leverage") available to SBICs. Among other improvements to the SBIC program, the bill also makes "transition" leverage available to commonly-controlled SBICs, which will allow successful SBICs to operate a second or third fund, while maintaining the safeguards necessary to mitigate the SBA's risk in the investment.