SBA Lending Matters Newsletter
A Word from Arne

SBA Administrator Karen Mills recently announced that she will be departing the agency as soon as a successor is named. Mills assumed leadership in the midst of the financial crisis, and has performed excellent work at the SBA. During her tenure, the agency offered bridge loans with a 100 percent guarantee for businesses stressed by economic events. The loan amount grew from $2 million to $5 million, guarantees were expanded, and guarantee fees were waived. More than 1,000 community banks began participating again in the SBA program, which, as Inc. Magazine recently reported, “had been dominated by a handful of large banks.”

H&M client Brighton Bank was one of those community institutions. Starting with zero SBA involvement in 2008, Brighton became the SBA’s Top Dollar Producer for Community Banks in Tennessee for 2010. Last year, the bank earned $367,000 last year from SBA loans facilitated by our team. And this is just one example.  According to the SBA, Mills' agency has helped 200,000 small businesses (as well as the community banks that serve them) by extending more than $100 billion in financing.

Several challenges, however, will face the next SBA Administrator – the budget sequestration being one of them. Mills and her agency have planned ahead for this event, and she expects that no SBA employees will be furloughed. But beyond these possible near-term budget issues, the new SBA chief will also face the lingering effects of the financial crisis. Small business lending by banks has fallen approximately $100 billion below pre-crisis levels, and SBA loans represent only about 10 percent of overall small business financing.

Mills says that whoever takes over her job will have more work to do making the SBA more visible to businesses that can benefit from its programs. My personal congratulations go to Ms. Mills for a job well done in this area. She has raised the SBA’s visibility among the public and government, and has been a vocal champion for small business. In an interview with Bloomberg Businessweek this year, Mills said, “We see entrepreneurship and small businesses and supply chains as a critical part of the economic growth and competitiveness agenda.” We couldn’t agree more.

As always, please call upon us with any SBA-related question or issue you have. We can serve as your out-of-house SBA loan department as a qualified Lender Service Provider. Holtmeyer & Monson – a Preferred Service Provider of the Independent Community Bankers of America – is happy to fill this need for your institution.

Featured Article

Best Practices: Determining Ownership Interests in a Small Business Applicant
By: Kimberly A. Rayer, Esq.

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 an 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 it's prudent to require a guaranty (whether full or limited, secured or unsecured) of 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 [email protected].

Regulatory Corner

Significant Changes Coming To SBA 7(a) and 504 Loans
The SBA has announced several proposed revisions of the 7(a) and 504 loan programs. The changes, recapped below, are geared toward streamlining the delivery of capital to small businesses and eliminating needless paperwork.

Simplified “Affiliation” rule. Currently potential applicants may be blocked from obtaining loans because their affiliate(s) exceed(s) a certain size standard. The SBA seeks to expand this size limitation. Eliminating or modifying the affiliation rule will reduce the lender’s documentation burdens, such as having to collect affiliates’ complete financial statements and/or tax returns.

Elimination of the “Personal Resources” test. Currently the SBA requires potential borrowers to “obtain a maximum level of personal finance resources,” a test that favors financially stronger applicants. Eliminating this rule will increase access to capital by a broader range of borrowers, assuming the change works in concert with the SBA’s “Credit Elsewhere” provisions.

Elimination of the “9 Month Rule” . This change applies to expenses included in 504 loan applications. Current requirements limit those inclusions to expenses occurring only in the 9-month period prior to the application date. Eliminating this rule will allow financing of all qualifying expenses, regardless of when they were incurred. The SBA also proposed increased accountability for the board of directors overseeing a Certified Development Company providing 504 loans.

Please call your Holtmeyer & Monson representative for more details about these changes.

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SBA Hot Topic
Environmental impact statements are required for 7(a) and 504 loans involving commercial properties. The SBA’s legal staff reviews environmental statements in loan applications submitted by Certified Lender Program (CLP) and General Program (GP) lenders. However, Preferred Lender Program (PLP) lenders – and many H&M clients hold this designation – must correctly perform their own environmental reviews utilizing SBA policy.


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