SBA Hot Topic Tuesday — The SBA 504 Loan and the Credit Elsewhere Test

January 30, 2018

By Bob Coleman
Editor, SBA Hot Topic Tuesday

SBA Hot Topic Tuesday — The SBA 504 Loan and the Credit Elsewhere Test

I obviously touched a nerve in my solicitation of industry comments regarding SBA’s 504 lending program.

Your 150 industry responses expose a huge disconnect between SBA and the execution of the CDCs mission of getting capital to Main Street. 41% of you believe SBA and SBA regulations have made the SBA 504 loan program unmanageable.

Credit Elsewhere

The chief complaint? Over one-third say the credit elsewhere rule is the number one item that needs to be fixed by SBA. Many are confused of how the SBA 504 loan program has morphed from a jobs creation loan program to a credit elsewhere test loan program.

This is an economic development (job creation) not a credit elsewhere program. It needs to be fixed in order for this program to be viable

Credit elsewhere. 504 was meant to be an economic development program. Personal resources have been backdoored in after having been eliminated by regulation… why? This should be fixed.

The 504 program has always been about a defined downpayment so that funds could remain within the business to allow the business to create jobs and grow. The brand new rules by the SBA on the 504 program, ignoring directives from the Trump administration associated with creating additional regulations, fly completely in the face of everything the SBA 504 loan program has ever stood for.

Many added that if excess liquidity is part of credit elsewhere, then bring back a personal resource test this is standardized and not open to interpretation.

Credit Available Elsewhere: No guidelines. Are you kidding me? Reinstatement of the Personal Resource Test is preferable to a policy with no guidelines. Then, we can be certain of this eligibility criterion.

The personal resources test associated with the credit elsewhere requirement is a severe detriment. Reviewing personal financial information for owners greater than 20% AND reviewing personal liquid assets of principals (along with spouses and minor children) creates a huge burden plus the determination of whether the assets are too great is entirely subjective.

The liquidity test is too vague….either leave it out, or put in specific parameters on it. Vague doesn’t work.

The personal resources requirement for owners between 10 & 20%. These are small businesses. Admittedly, there may be a handful of folks with excess liquid assets, but in over 20 years I haven’t seen many. I feel like SBA is trying to wipe one or two specks off the glass by shooting it with a missile.

Back off on the credit elsewhere test and rejoin the real world. Looking at financials of non-principals is onerous. Just because someone invests in a business doesn’t mean they are making all their personal assets available to that business.

Much more to be continued. . . . .

The Poll Results (150 responses)

What is your opinion of the SBA 504 lending program?
SBA regulations are making it unmanageable — 41%
It’s ok, but difficult at times — 32%
Needs tweaks, but it is fine –17%
Working as intended — 9%

Do you believe the new SOP works for CDCs
If we fix one or two major items we’ll be fine — 45%
No, we can’t operate this way — 17%
There are challenges, but we’ll make them work — 15%
Yes — 4%
No opinion — 19%

The credit elsewhere provision in the new SOP for SBA 504 lending is:
A severe detriment — 60%
A challenge we’ll work through — 20%
OK — 11%
No opinion — 8%

The changes in equity injection in the new SOP for SBA 504 lending is:
A challenge we’ll work through — 42%
A severe detriment — 33%
OK — 18%
No opinion — 6%

The Debt Refinance provision in the SOP for SBA 504 lending is:
A challenge we’ll work through — 38%
A severe detriment — 30%
OK — 21%
No opinion — 17%

The change in the personal guaranty requirement for SBA 504 lending is:
A severe detriment — 37%
A challenge we’ll work through — 35%
OK — 20%
No opinion — 8%

My employer is a
CDC — 54%
SBA 7(a) Lender — 31%
SBA — 3%
Other — 13%