SBA Lending Matters Newsletter
A Word from Arne

September 30 marked the conclusion of SBA’s fiscal year 2013-2014 and I’m happy to report it ended on a high note. Fee relief on 7(a) loans of $150,000, is being extended through FY 2015, and fee relief measures for SBA Veterans Advantage will be renewed and enhanced next year. Both of these measures contributed to overall positive results in 2014. Based on the agency’s weekly and monthly records, our count shows that 7(a) lenders kept up a healthy increase in activity this year, with $19.9 billion in loans approved for 52,044 accounts. 504 loan activity fell short of its bonanza results in 2012, but all small business lending got off to a slow start due to a partial government shutdown and harsh winter weather. A September survey of SBA lenders, summarized by Charles H. Green, indicates that they “continue to be optimistic about business prospects for the SBA’s 2015 fiscal year.”

We’re optimistic, too, and making positive changes of our own. Over the next month we will be implementing a new SBA application processing platform, our latest initiative to ensure that H&M clients always benefit from the highest level in-state-of-the-art technology. As a result, expect to see meaningful improvements in our delivery process and turn- around time for 7 (a) and Express applications.

Although we deal primarily with SBA guaranteed loan programs, we also process a number of USDA loan applications. Generally these fall under the USDA Business and Industry programs. USDA loan programs have proven to be good alternatives to SBA loans. While the limit under SBA loan programs is generally $5,000,000 per borrower, USDA programs can provide up to double this amount. Additionally, if an SBA borrower has used all available eligibility, they may still be eligible for USDA funding.  If you’re interested in generating USDA loan applications, please contact us for details.

I write this hoping to see you at The National Association of Government Guaranteed Lenders (NAGGL) annual meeting – if not there, maybe at another industry event. In the meantime, please call or email with any SBA-related questions. All of us at Holtmeyer & Monson are happy to help.

Featured Article

Best Practices: The Eligible Passive Company Rule
By: Katie O'Brien
http://www.starfieldsmith.com

The Eligible Passive Company Rule (the “EPC Rule”) is a familiar concept in the world of SBA lending, but the nuances are sometimes overlooked. In general, SBA prohibits loans to “passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds.” But SBA makes an exception for eligible passive companies, or EPCs as they are more commonly known. An EPC may obtain SBA loan proceeds to purchase or lease and/or improve or renovate real or personal property that it leases to an operating company(ies) (the “OC”) for the OC to use in its business. An EPC may also use SBA loan proceeds to refinance debt incurred for these purposes. But an EPC is not permitted to use loan proceeds to purchase a business, acquire stock in a business or acquire any intangible assets of a business or to refinance debt incurred for any of these purposes.

Most lenders are familiar with some of the basic requirements of the EPC Rule, such as:

  • The EPC must lease 100% of the real or personal property to an OC.
  • The lease must have a term equal to or greater than the term of the loan.
  • The EPC can not make a profit on the lease payments from the OC – i.e. the lease payments can not exceed the amount of the loan payment plus a reasonable amount to cover the EPC’s costs and expenses of holding and maintaining the property, such as maintenance costs, property taxes and insurance.

SOP 50 10 5(F) (the “SOP”) at pages 104-106 further sets forth the requirements related to the EPC Rule and specific provisions related to EPCs. Although most lenders are familiar with these basic requirements, lenders must still be careful in applying the rule to their specific loans and must pay attention to the nuances. For example, SBA prohibits multiple EPCs in a transaction. Borrowers sometimes prefer to form a separate real estate holding company for each property that they purchase. If an SBA loan is being used to finance two properties, the loan will not be eligible if the borrower forms two separate EPCs.

When determining if an EPC/OC loan structure is appropriate for a given loan, it is important to look at the purpose of the loan and the proposed use of loan proceeds. For example, if the loan is solely to acquire a business or provide working capital, and no part of the loan proceeds will be used to purchase real or personal property (such as equipment) or renovate property, an EPC/OC structure would not be eligible for SBA financing. A borrower may have an affiliated real estate holding company that is pledging real property as secondary collateral to secure the loan, but the loan should not be structured as an EPC/OC loan. The real estate holding company in this particular example should not be considered an EPC and cannot be a borrower on the loan (as it would be an ineligible SBA applicant), but instead the real estate holding company can be a guarantor on the loan.

As the SOP states, because the EPC Rule is an exception to the rule that passive entities may not receive SBA guaranteed financing, it is interpreted strictly. It is important that lenders understand the nuances of the EPC Rule and interpret the rule correctly because failure to do so will often lead to a denial of the SBA guaranty. For questions regarding the EPC Rule, contact Katie at 267-470-1207 or [email protected].


Regulatory Corner

Increase in SBA Loans Authorized
There’s no threat of an SBA funding shortage next year. An appropriations law enacted September 19 increases the amount of SBA loans available through FY 2015 to $18.5 billion, paving the way for the 7(a) loan program to realize its fastest growth since 2011. The allocation adds $1 billion in annual funding. By September 15 of this year, the loan approvals had already reached nearly $17.5 billion, and large 7(a) loans over $2 million in size are a big reason for this volume. The improving health and capital demands of small businesses, coupled with political support for its loan programs, clearly demonstrate the ongoing value of the SBA.

Please call your Holtmeyer & Monson representative for more details.

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SBA Hot Topic
The Small Business Administration has changed the procedure for paying loan guaranty fees electronically, requiring lenders to use a new process. Click here to access the new procedure. Questions? Give us a call.

 

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