SBA Lending Matters Newsletter
A Word from Arne

It’s a known fact that SBA loan programs provide a tremendous economic benefit that to banks and borrowers. However, there are also misunderstandings surrounding these valuable programs, and those of us who work in the government-guaranteed loan industry encounter them on a regular basis. I’m taking this opportunity to clear up some common myths regarding the Small Business Administration.

1.  The SBA lends money.  Untrue.

I recently got a call from a borrower whose application for an SBA 7a loan had been denied. The borrower misunderstood – with no help from the bank – the reason that his loan had been declined. He thought that the SBA had rejected his application, and that no other good options were left to him. In fact, the bank had declined the loan, and had miscommunicated this fact to the borrower.

The SBA does not lend money. Rather, the agency provides loan guarantees to lenders as a form of credit enhancement.  The lenders, in turn, offer loans directly to credit worthy businesses.  In the case of the borrower mentioned above, we were able to place the financing with another bank, which received a 75% full faith and credit guarantee from the SBA for the direct loan it made to the businessman.

2.  There is no need to pledge personal collateral on an SBA loan. Wrong.

In our practice, we run into this misconception all the time. In the SBA loan decision process, the ability to repay the loan from the business’s cash flow is a primary consideration, but collateral and a business owner’s equity contribution are also important considerations. The SBA requires all owners of twenty percent (20%) or more of a business to personally guarantee an SBA loan. In cases when business assets (such as equipment, buildings, accounts receivable, etc.) fall short of fully collateralizing the guaranteed portion of an SBA loan, the concept SBA employs is simple – and very fair. The business’s principal(s) MUST make personal collateral available. Generally this is done via securing personal guaranty(ies) that the principal(s) will cover repayment of the loan. If a collateral shortfall still exists after all available personal collateral is made available, SBA will not decline the application solely because of the shortfall. Good character, management capability, collateral and owner’s equity contribution may also be considered.

3.  SBA loans are as easy to get as conventional credit facilities. Sometimes not – but boy, are they worth it!

The SBA’s mandate is to provide access to capital for creditworthy borrowers who are not able to get loans on terms and conditions available elsewhere. Sometimes this makes the SBA process less streamlined than conventional transactions, but that’s okay. The positives greatly outweigh the negatives. And there are experts who can make the process considerably easier, at no net cost to the bank. In making an SBA loan, as with any credit, selecting the right lender is critical. Lenders who specialize in SBA transactions, or who use a well-qualified Lender Service Provider, give borrowers the best chance for successfully securing a government-guaranteed loan.
As always, please call Holtmeyer & Monson with any SBA-related question or issue. Our expertise in SBA lending has earned us recognition as a Preferred Service Provider by the Independent Community Bankers of America. We serve as the out-of-house SBA loan department for many banks as a qualified Lender Service Provider, and we would be happy to fill this need for your institution.

Featured Article

SBA Eligibility of Non-U.S. Citizen Owned Businesses
By: Janet M. Dery, Esq.
http://www.starfieldsmith.com

In connection with each application for an SBA-guaranteed loan, a lender must obtain a completed and executed U.S. Small Business Administration ("SBA") Statement of Personal History (SBA Form 912) from each proprietor, general partner, officer, director, LLC managing member, 20% owner, Trustor and manager of day-to-day operations of the applicant. A U.S. born or naturalized citizen will indicate his or her citizenship by checking "yes" to the question of whether such person is a U.S. citizen. At times, however, a lender may receive a completed Statement of Personal History that indicates the principal is not a U.S. citizen. In such cases, the lender must determine whether the business is still eligible for SBA-guaranteed financing.

According to the SBA, financial assistance may be provided to "businesses that are 51% owned and controlled by persons who are not citizens of the US provided the persons are lawfully in the United States" (SOP 50 10 5(D), page 120, Section E). If the principal indicates on the Statement of Personal History that he or she is a lawful permanent resident alien ("LPR"), the lender must obtain proof of this fact. The proof should consist of the U.S. Citizenship and Immigration Services ("USCIS") Form I-551 (commonly known as a "green card"), which will be in the form of either a Resident Alien Card or a Permanent Resident Card. Lenders should verify the information on such form, including confirming that the applicable Card is not expired, as the form must be renewed every ten (10) years. So long as the LPR status is verified by the lender, and subject to meeting all other SBA eligibility requirements, the business owned by such LPR will be eligible to receive SBA-guaranteed financing.

The Documentation/Closing phase of an SBA loan is an area that results in many repairs and denials of the SBA guaranty. Often, lenders will miss items in their due diligence such as intervening liens, missing tax transcripts, insufficient payoff letters, etc., that can give rise to repairs or denials of the SBA guaranty. SBA reports that the most frequent reason for a repair of the SBA guaranty is the failure to obtain the correct lien position on collateral as set forth in the Loan Authorization. Lenders' failure to perform the correct searches and/or to resolve issues shown by the searches properly and thoroughly is often to blame. Additionally, failure to obtain a commitment from a creditor to release the lien being paid off also creates problems for lenders. Finally, lenders sometimes fail to properly document and/or perfect their liens which can also risk the guaranty.

If the principal is not an LPR, the lender must verify the principal's status before it can consider making an SBA-guaranteed loan to the applicant business. Using the alien registration number supplied by the principal on the completed Statement of Personal History, the lender must submit to the SBA's Sacramento Loan Processing Center a completed USCIS Form G-845 Document Verification Request, along with a copy of the principal's USCIS documentation, and a signed and dated authorization statement from the principal, using verbiage set forth in SOP 50 10 5(D), authorizing the release of his or her status to the lender. Lenders should note that the Department of Homeland Security has recently revised USCIS Form G-845, and should be sure to use the version of the Form that indicates an expiration date of "01/31/2015" in the upper right corner of the first page. The lender must insert "SBA-guaranteed loan" as the basis for the request in accordance with SOP 50 10 5(D), page 122, Section 5.a.(3).

If the result of the status inquiry indicates that the principal is (i) a documented alien admitted to the U.S. for a specific purpose and for a temporary period of time, (ii) an asylee or refugee (person receiving temporary refuge) with LPR status, or (iii) an alien subject to the Immigration Reform and Control Act of 1986 ("IRCA"), the applicant business might be considered eligible, provided the following additional requirements ("Additional Requirements") can be met:

  1. the current management must have been operating the business for at least one year prior to the application date and/or the personal guaranties of the management will be a condition of the loan; and
  2. there must be pledged collateral within the United States that is sufficient to pay the loan in full at any time during the term of the loan.

Finally, if (i) a business is owned and managed by foreign nationals, foreign entities, or non-immigrant aliens, (ii) the business is not listed in Appendix 1 of the SOP 50 10 5(D), and (iii) the Additional Requirements can be met, the applicant business might be eligible for SBA-guaranteed financing. Such loan should be submitted to the SBA for general processing.

Of course, a proposed loan must also meet all other SBA eligibility requirements to be eligible for SBA financing.

For more information on the eligibility of non-U.S. citizen owned businesses, please contact Janet at (215) 542-7070 or [email protected].


Regulatory Corner

Refinancing Personal Debt
We regularly run into situations where borrowers want to use an SBA loan to refinance personal debt that they used for business purposes. This issue has been somewhat of a moving target with the agency.  Following is the SBA’s current position on the subject.

If a borrower has a personal loan for which the proceeds were originally used for an eligible business purpose, AND the loan is reported on the business Balance Sheet, AND the interest expense on the loan has been reported on the business Operating Statements, the debt IS ELIGIBLE for refinancing. Sometimes, the lender holding the personal loan is willing to simplify the transaction by modifying the promissory note to reflect the business as the borrower.

Conversely, if the borrower has a personal loan for which the proceeds were originally used for an eligible business purpose and the debt HAS NOT been reported on the business Balance Sheet, AND the interest expense on the loan HAS NOT been reported on the business Operating Statements, the debt is generally NOT ELIGIBLE for refinancing with an SBA loan. We should also add that the borrower should not retroactively revise business financial statements to reflect this personal debt, as that solution would be unacceptable. If you would like clarification of this issue, or if you have any other related needs, just give us a call.

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SBA Hot Topic

SBA has increased the maximum loan amount available through the Small Loan Advantage (SLA) loan program to $350,000. Previously the limit was $250,000. The change was enacted to encourage lending to creditworthy borrowers in underserved markets. The SLA program is a sub-program of the 7(a) program, and the terms and conditions of the parent program apply. Borrowers are evaluated using a credit scoring mechanism, and must be prescreened before their formal applications can be processed.  All applications must be submitted via E Tran. Please call your Holtmeyer & Monson representative for additional details about this program.

 

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