Determining Ownership Interests in a Small Business Applicant

By: Kimberly A. Rayer, Esq.
Starfield & Smith P.C.

Determining the owners of a Small Business Applicant is an important first step in establishing eligibility and structure for an SBA loan. Lenders should carefully review business records as well as the personal financial statements from each owner of the Small Business Applicant in order to determine the correct ownership of the business. In general, once the threshold of twenty percent (20%) ownership in a Small Business Applicant is crossed, further due diligence on part of the lender, including conducting a personal resource test and 912 investigation, determining available collateral and guaranty requirements is triggered.

Per 13 CFR 120.102 and as set forth in SOP 5010 5(e) Subpart B, Subsection III, C. 7, as part of the credit elsewhere test, the SBA requires the personal resources of any owner of 20% or more of the Small Business Applicant be reviewed. This includes not only individual owners, but 20% combined ownership interest of individuals with spouses and dependent children. The applicant is presumed to have access to the personal resources of his/her spouse and dependent children. Although the Lender cannot require the injection of the spouse’s personal resources, it can require injection of the personal resources of minor children and can further determine that the applicant is ineligible because of access to a spouse’s personal resources. This is true even when the spouse or dependent children have no ownership interest in the business. The only exception to this requirement is if there is a legal impediment to the owner’s ability to use the spouse’s or dependent children’s individually-owned property to secure the SBA loan, such as those held by an independent trustee of an irrevocable trust.

If the Small Business Applicant is owned by a Trust, the personal resources rule applies to the Trustor. All donors to the trust will be deemed to have Trustor status for eligibility purposes irrespective of the amount granted to the trust. If the ownership is another company, the personal resources rule does not apply to the business resources of the associate or affiliated business, however, the lender may look to the affiliated business for available collateral and an unlimited guaranty as discussed further in this article.

The personal resources test applies to any person who would have been subject to the utilization of personal resources test in the 6 months prior to the date of the loan application, even if that person has changed his or her ownership interest to less than 20%. The only exception to the 6-month look back period is when that person completely divests his or her interest prior to the date of application. Complete divestiture includes divestiture of all ownership interest and severance of any relationship with the Small Business Applicant (and any associated Eligible Passive Concern) in any capacity, including being an employee (paid or unpaid).

Another requirement for a Lender extending a SBA loan is to confirm that the Small Business Applicant is not doing business with an Associate of Poor Character (13 CFR 120.110 (n)) . To determine eligibility under this section, the SBA requires that, “… every proprietor, partner, officer, director, and owner of 20% or more of the Applicant (“Subject Individual”) must be of good character. The completion of an SBA Form 912, Statement of Personal History (“912″), by each Subject Individual is required as part of the character evaluation process and the form must be completed within 90 days of submission of the application to SBA.” See SOP 5010 5(e), P.110

A Subject Individual may not reduce his or her ownership in a Small Business Applicant for the purpose of avoiding a Form 912 investigation. Further, the same 6 month look back period applies for the purpose of the 912 Investigation as with the Personal Resources Test.

Finally, SBA regulations require that any 20% or more owners of a Small Business Applicant must provide an unlimited guaranty of the SBA Loan on SBA Form 148. Lenders should be mindful that Small Business Applicant’s ownership cannot be structured or modified to specifically circumvent the 20% ownership threshold to avoid the guaranty requirement. Further, the SOP states that 20% or more ownership is a minimum threshold for requiring a full guaranty of the SBA loan. Lenders should consider their internal lending guidelines for non-SBA loans to determine if its prudent to require a guaranty (whether full or limited, secured or unsecured) of an owners of less than 20% ownership of a Small Business Applicant. At a minimum, if no one individual or entity owns 20% or more of the Small Business Applicant, at least one individual or entity must provide a full unconditional guaranty of the SBA loan.

For more information on SBA lending requirements, please contact Kimberly A. Rayer at (215) 542-7070 or at