December 19, 2017
By Bob Coleman
Editor, SBA Hot Topic Tuesday
SBA Hot Topic Tuesday — SBA Expands “Credit Available Elsewhere” Guidance
SBA issued a notice yesterday listing a slew of technical corrections for the SBA 5010 (J) that will be effective on January 1. An updated SOP was also issued with the technical corrections.
The first takeaway is to make sure you are using the new version of the SOP that incorporates these changes. It is linked at the bottom of this report. The easy way to determine if you have the correct SOP 5010 5 (J) is the first version consists of 410 pdf pages, while the updated version is 413 pdf pages.
The most important change is SBA’s clarified guidance concerning the Lender’s and CDC’s certification that the Applicant does not have credit available elsewhere on reasonable commercial terms without the SBA 7(a) guaranty, or SBA 504 loan.
The new language released in yesterday’s SOP technical corrections:
For SBA 7(a) Loans:
If the Applicant’s cash flow and collateral, including the adequacy of any third party guaranty, would cause the Applicant’s loan to meet the conventional credit standards of the Lender, an SBA guaranty is not available for the loan.
For SBA 504 Loans:
If the Applicant’s cash flow and collateral, including the adequacy of any third party guaranty, would cause the Applicant’s 504 loan request to meet the conventional credit standards of the Third Party Lender, the Project is not eligible for a 504 loan.
Second, SBA has clarified the credit elsewhere test applies to all owners of more than 10% of the small business. This raises the possibility of an individual who owns less than 20% of the business may not personally guarantee the loan, but will be subject to the credit available elsewhere test.
For SBA 7(a) and 504 Loans:
Non-Federal sources related to the Applicant, including the liquidity of owners of 10% or more of the equity of the Applicant, their spouses and minor children, and the Applicant itself; or
For your review, here is a quick recap of the credit elsewhere test.
A common audit error is the lender or CDC not being specific in documenting the credit memo with one, or more of the five credit available elsewhere tests:
- The business needs a longer maturity than the Lender’s policy permits (for example, the business needs a loan that is not on a demand basis)
- The requested loan exceeds the Lender’s policy limit regarding the amount that it can lend to one customer.
- The collateral does not meet the Lender’s policy requirements.
- The Lender’s policy normally does not allow loans to new businesses or businesses in the Applicant’s industry.
- Any other factors relating to the credit (such as business and personal credit history) that, in the Lender’s opinion, cannot be overcome except for the guaranty.
The rest of the technical corrections from the SBA Notice include:
SBA 7(a) Lending
Clarified the requirements that individuals be either Co-Borrowers or Guarantors in certain change of ownership transactions.
Clarified the minimum equity requirements for start-up businesses and change of ownership transactions by providing definitions of “start-up business” and “total project costs.”
Clarified the collateral requirements for 7(a) Small Loans to require a lien on the Applicant’s fixed assets, including real estate, up to the point that the loan is fully secured.
SBA 7(a) and SBA 504 Lending
Added examples of supporting documentation necessary in connection with the submission of the Religious Eligibility Worksheet (SBA Form 1971) to determine the eligibility of a business with religious aspects.
Clarified the revised franchise procedures concerning, among other things, Applicants that operate under multiple agreements and the procedure for submitting applications involving franchise or similar agreements.
SBA 504 Lending
Clarified the Borrower’s contribution for Projects involving a Limited or Special Purpose Property. For any business (including affiliates) that has an outstanding debenture for a Project involving a Limited or Special Purpose Property, for each subsequent Project involving a Limited or Special Purpose Property, the borrower must contribute at least 20%.
The full list of examples of Special Purpose Properties was reinserted, with the exception of “Clubhouses” and “Museums,” which have been removed from the list. Also clarified that SBA may determine that other properties meet the Limited or Special Purpose Property definition
Clarified that in cases of a Project that will finance both a New Business and a Limited or Special Purpose Property, the number of outstanding debentures for a Project involving a Limited or Special Purpose Property will not increase the percentage of the borrower’s contribution beyond 20%.
Clarified that, for eligible Energy Public Policy Projects, the outstanding Gross Debentures issues for a small business concern, including its affiliates, may not exceed $16.5 million in the aggregate.
Clarified which changes in CDC personnel require prior SBA approval and which must be reported to OFA no later than 30 days after the change takes place.
Clarified that a Board Member may submit evidence of a federal clearance (e.g., FDIC, OCC, Federal Reserve) from the individual’s current employer in lieu of a fingerprint card (FD-258) or Electronic Fingerprint Submission when the Board Member is required to submit SBA Form 1081.
Clarified that a Loan Committee member must submit fingerprints with the completed SBA Form 1081 only if the individual answers “yes” to question numbers 10a, 10b, 10c, 11a, and/or 11b on the SBA Form 1081. In addition, the individual also may submit evidence of a federal clearance (e.g., FDIC, OCC, Federal Reserve) from the individual’s current employer in lieu of a fingerprint card (FD-258) or Electronic Fingerprint Submission.