May 5, 2015
By Bob Coleman
Editor, SBA Hot Topic Tuesday
In the new SOP, SBA has simplified the documentation for the applicant and the lender.
Debt on the business balance sheet is eligible to be refinanced if it the interest expense is reported on the tax return.
Credit card debt may be refinanced if the card is in the business name and the applicant certifies the card is exclusively used for business purposes.
Here are the specifics:
DEBT REFINANCING [5(H) ‐ pages 111‐112; 5(G) ‐ pages 108‐109 & 110) – “SOP 50 10 5 (H) contains
significant modernization of the specific requirements regarding how a lender must document and support debt refinancing”:
E. Policies Regarding Debt Refinancing
1. SBA guaranteed loan proceeds may not be used to refinance debt originally used to finance a loan purpose that would have been ineligible for SBA financing at the time it was originally made unless the condition that would have made the loan ineligible no longer exists.
a) Debt reflected on the applicant’s business balance sheet may be eligible if it has been reported on the applicant’s business tax returns (Schedule C for sole proprietorships) showing the intere0t expense associated with the debt and;
i. If the debt to be refinanced was the first extension of credit, the lender must document that the proceeds from that debt were used exclusively for the applicant business and were not used for any ineligible purpose as set forth in 13 CFR § 120.130.; or ii. If the debt to be refinanced was used in whole or in part to refinance a prior debt, the debt must be reflected on the applicant business tax returns (Schedule C for sole proprietorships) for the prior two full tax cycles, showing the interest expense associated with the debt, and the borrower must certify in accordance with 13 CFR § 120.130 that the debt to be refinanced was used exclusively for the applicant business and were not used for any ineligible purpose.
iii. If the debt is in the form of an outstanding balance on a credit card issued to the small business, the lender may refinance the credit card debt after confirming that the credit card is in the name of the business and obtaining the applicant’s certification that the credit card debt being refinanced was incurred exclusively for business related purposes. If the business credit card was also used for personal reasons, the applicant must identify which purchases were for personal reasons and that amount must be deducted from the credit card balance. Loan proceeds must not be used to refinance any personal expenses.
b) Debt in the personal name of the applicant owners such as a Home Equity Line of Credit (HELOC) or credit card debt that was used for business purposes may be eligible for refinancing if:
i. For HELOC debt, the applicant must certify that the amount being refinanced was used exclusively for business purposes and provide appropriate documentation. For example, a sole proprietor may demonstrate that the debt was used for business purposes by providing documentation that shows the interest deduction is reported on the Schedule “C” not the Schedule “A” of the proprietor’s tax return. If the interest deduction reported on the Schedule C includes multiple debts, then the applicant must provide a copy of the appropriate IRS Form 1098 related to the debt being refinanced.
ii. If the debt is in the form of an outstanding balance on a credit card issued to an individual personally, the lender must confirm which of the credit card obligations were used for business purposes. Lenders must document the specific business purpose of the credit card debt and the applicant must certify that the loan proceeds are being used only to refinance business expenses. Documentation required for refinancing personal credit card debt includes a copy of the credit card statements and individual receipts for any business expenses in excess of $250. In all cases, the applicant must certify that the amount that will be refinanced was used exclusively for business expenses.
Access Highlighted SOP 5010 (H) changes here
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