SBA Loans: The Missing Manual

PrudentLenders has received many questions from borrowers and lenders regarding SBA loan structure, eligibility, guarantees, affiliation, and collateral. These questions encompass a wide spectrum of issues and we have provided access to them here.

SBA Loans: The Missing Manual

Questions and answers on SBA loans.
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These are not the formal, stated policies of SBA, are not produced by SBA, and should not be relied upon for any decision by anyone. These are the responses of PrudentLenders to inquiries we have received. We are making this available for information purposes only. If you would like to speak with a representative, we invite you to visit PrudentLenders.com. You may also send your questions to jnoone@prudentlenders.com. PrudentLenders provides SBA loan processing and SBA portfolio servicing to community bank clients across the country.

SBA Loans: The Missing Manual

QUESTION: We have a prospective borrower that is starting a medical device manufacturing and distribution company. The Principal will be 60% owner. A Dutch company named XXXX will be 40% owner. We have advised the borrower that this company would need to guarantee the loan and produce financial statements which, in conjunction with other affiliates, reflect that it is small by SBA standards. Is this eligible for SBA? ANSWER: If the principal who owns 60% is a US citizen, then the loan would be eligible based on the information provided. FOLLOW-UP QUESTION: Does the foreign firm need to guarantee and abide by the size standards? ANSWER: Yes. FOLLOW-UP QUESTION: How do we address financial statements of the Dutch company produced in the Dutch language? ANSWER: These statements will need to be translated into English and submitted with the Application.

QUESTION: Can an SBA 7a loan be used to refinance loans made by shareholders to the OC? ANSWER: No, shareholder loans are ineligible.

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QUESTION: We have a borrower looking to use the 7a program to refinance an existing term loan of $347K and to fund new working capital of $280K. The borrowers landlord recently sold the building. The new building owner is looking to convert the building to residential condos instead of the current mixed use layout. The OC business owners will be beginning the process of looking for a new location over the next 12-18 mos as their lease is for another 3 yrs. While no use of funds are going toward any new leasehold improvements and the term loan was only for working capital (no previous leasehold use of funds), is it a requirement that the owners have a lease in place for the term of the loan even though they know they will be seeking new space in the foreseeable future which will meet the needs of the business? ANSWER: Generally the lease term must be as long as the loan term. However, exceptions can be made. The Credit Memorandum should outline why a lease shorter than the term of the loan is needed and justified.

SBA Loans: The Missing Manual

QUESTION: We have always operated with the understanding that Trustors are required personal guarantors in projects where the trust has a controlling interest in the OC or EPC. However, upon reading the SOP page 304, we noticed that the conditions applying to trusts do not specify that the Trust being examined for SBA eligibility need have a controlling interest. We have a borrower that owns 75% of a business. A previous minority business owner (nonmanager) had established a Trust into which he placed his 10% ownership of the business. we are not looking for this previous owner to be a guarantor as the trust owns less than 10%. Is this correct in not requiring the personal guarantee of the previous business owner (at least based on ownership amount)? ANSWER: If the trustor owns less than 20% (combined individual ownership and trust ownership) then their personal guarantee would not be required as a policy matter.

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QUESTION: We have a borrower that is purchasing an auto body shops assets. He is paying $700K to purchase the real estate and equipment in total with $500K allocated to real estate and $200K for the equipment. If the Real Estate appraisal comes in at $1 million, do we need to place a lien on the equipment? ANSWER: Yes, a lien would be placed on the equipment.

SBA Loans: The Missing Manual

QUESTION: We have an assisted living facility with which we have been working. The Borrowers have an existing purchase money mortgage of $6 million for which we are looking to utilize the Temporary 504 Refi program. We are also looking to use the Traditional 504 program for an expansion project (same tax parcel, new building) with a total cost of $4 million. We are looking to split the refi funding 50/50 and then provide a traditional 50/35/15 (special purpose) structure for the expansion funding. With this in mind, and as both loans will close simultaneously, it is my understanding that we would have a 1st and Bridged 2nd, as a result of the refi, at closing, and then would also have the Construction/Interim lien as 3rd. Following debenture funding for the refi, SBA would slide into 2nd, behind our 1st on the refi, and then following construction disbursements and issuance of C/O and SBAs expansion take-out, we would be left with a 3rd and SBA with a 4th. Is it possible to allow that we can have a consolidated 1st and SBA would have a consolidated 2nd? ANSWER: The SBA second on the refi loan must remain in 2nd and cannot subordinate to the lenders expansion 3rd.

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QUESTION: We have a borrower that is using a 7a loan to purchase commercial property with a total project cost of $1 million. As the liquidation value (85%) based on the appraisal is $850K, there is a $150K shortfall at the business level. The borrower owns an investment property personally that is owned free and clear and which is valued at $1 million. Is the amount of the lien placed on the investment property equal to the collateral shortfall at the business level ($150K) or to the full amount of the loan ($1 million)? ANSWER: The lien is for the full amount of the loan.

SBA Loans: The Missing Manual

QUESTION: If the borrower is working with a loan broker and pays them a fee outside of the transaction, can it be included as part of the project cost and be reimbursed from proceeds? ANSWER: No.

QUESTION: What is the appraisal date requirement on 504 loan requests? Within 6 months, 12 months? ANSWER: The appraisal must be current within six months for Temporary Jobs Act debt refinance projects as per the SBA policy notice. For the permanent 504 program, there is no policy guidance, but as a credit matter SBA wants the appraisal to be current within twelve months as to the date of loan application.

QUESTION: Can Real Estate broker fees be included as eligible costs in SBA requests? ANSWER: Yes, if they are fees being paid by the borrower. We cannot pay seller broker fees.

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QUESTION: Does SBA require spousal signature if jointly-owned personal assets are being pledged to secure a 7a loan? If personal assets are not being pledged, but joint assets are included in the collateral justification of a loan request, is a spousal signature required if only the business-owning spouse is the only personal guarantor? ANSWER: SBA requires the spouses signature on the personal financial statement regardless of the scenario. It is for eligibility determination and not to address personal guarantees.

SBA Loans: The Missing Manual

QUESTION: We have a borrower with $1.5 million in Liquid Assets. He is looking to buy a Building and fund Renovations which, including the closing costs, will result in a total project amount of $1.4 million. The Liquid Resources test requires he inject $100K. The 10% Equity injection required is $140K. If he injects the 10% required ($140K) does he need to inject any additional funds or does Liquid Resources injection calculation occur prior to the Equity requirement of the project? ANSWER: The methodology for the requirement is explained in paragraph 10 on pages 284285 of the SOP 50 10 5(E). Basically, you figure out the exemption, then excess above that amount must be injected.

QUESTION: We have a machine shop borrower that is owned 33/33/33 by three individuals today. One of the owners would like to expand in a more focused manner into the finishing side of the business based on current success within the existing business in this product line. He is forming a company to be owned 100% by him and will be purchasing a building two parcels down the street. The existing business has about 20% of its revenues come from finishing services. If the loan is underwritten from the cash flows of the existing business and the projected cash flows of the new business, is 10% the required Equity injection into the building purchase or is 15% required since he is the only owner? ANSWER: This new business will require the new business financing structure for 504 purposes.

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QUESTION: We have a borrower that would like to refinance a seller note. As he missed payment on this loan in the past, we are unsure this will be eligible for SBA refinancing. We feel there is business rationale for the missed payment, the refinancing would not transfer inherent risk because of the high current rate of the seller note, and we would like to send it in through GP submission for SBA consideration because of this. However, we cannot communicate to the borrower that it will or will not ultimately be eligible for SBA as we are unsure at this point. Can the lender/borrower submit the application and hold off ordering the necessary business valuation. Doing this will allow them to know whether their application is eligible without having to pay for the business valuation upfront and then being found ineligible. The business valuation would be ordered as soon as the loan was found eligible. ANSWER: When refinancing a seller note, a business valuation must be submitted with the loan application package if possible. However, you may submit the loan package to determine if the seller note will be eligible.

SBA Loans: The Missing Manual

QUESTION: We have a borrower that has a Shareholder Loan that was used for Property Improvements. We have all the transcripts showing that it has been paid as agreed and that it was used for improvements. Is this eligible for refinancing? ANSWER: No. Loan proceeds can go to an associate or an affiliate. It does not appear that this loan is eligible for refinancing.

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QUESTION: We have a borrower looking to refinance a $1.9 million loan through the 7a program. There are 5 lots. The OC/ Dealership is on Lot A and $1.2MM of the $1.9MM debt specifically went to acquisition of dealership, refinance of dealership debt, and lot on which dealership stands at some point in the past. There are 4 other lots that are investment properties and were funded by $700M which was added into the one note at a later date. Would SBA consider refinancing a $1.2MM note, and then we could separate $700M and do that piece conventionally using cash flow of remaining 4 lots? ANSWER: You could refinance the $1.2MM debt associated with the business and take care of the land debt via a conventional loan. However, doing the latter could possibly trigger a credit available elsewhere situation.

SBA Loans: The Missing Manual

QUESTION: We have a borrower that was provided an Authorization on a 7a loan request through another lender. The loan has not closed yet. They were in contact with our bank, which is much closer to their facility and our bank has approved (internally) the same request as was submitted to SBA and for which an Authorization was previously issued. They would like to move forward with the 7a loan with us and replace the existing lender. What process needs to occur in order for us to receive an Authorization from SBA? What we and the borrower need to do in order to complete this? ANSWER: To transfer the guaranty between participating lenders prior to final disbursement, lender must submit a written explanation to the Standard 7(a) Loan Guaranty Processing Center along with any supporting documentation. (Transfers after final disbursement must be sent to the appropriate CLSC in accordance with SOP 50 50.) The existing Lender must concur with the transfer.

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QUESTION: We have a borrower that is requesting a 504 and 7a loan to complete the purchase of RE and the related business acquisition. The total financing for both projects is $1.07 million. They maintain $126K in liquid assets and are contributing $56K of this for the 10% required injection (per their CDC) in the 504 building purchase. They buyers will then have net available liquid assets of $59K. There is a collateral shortfall for the 7a loan of $351K as much of the purchase price allocation is for goodwill and there is no Equity available in the home. Is it necessary to secure any of these liquid funds or is this not needed as they are less than the exemption amount? ANSWER: Any remaining personal liquid assets need to be pledged if the loan is not fully secured by other assets.

SBA Loans: The Missing Manual

QUESTION: We have a borrower using the entirety of his liquidity to effect the 10% equity requirement in a 504 project. He is also seeking to purchase the business through use of the 7a program. Is this possible without an equity injection into the 7a project? ANSWER: 7a will not finance a 100% change of ownership deal.

QUESTION: Is it permissible to provide working capital in order to pay sales taxes payable? ANSWER: No, it is an ineligible use of proceeds.

QUESTION: We have a borrower looking to use the CAPLine program. We have two questions: 1. Can financial covenants be enforced on CAPLines? 2. The business is a clothing manufacturer. The business owns its Raw Materials, is not funding against WIP, and has the Finished Goods delivered to its warehouses. The Raw Materials, while owned by the business, are held at cut-and-sew shops that do preliminary work. We have written-in semi-annual site audits into the agreement

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SBA Loans: The Missing Manual

ANSWER:

but want to make sure that SBA can fund against the Raw Materials prior to making a formal commitment. Is this situation with Raw Materials owned OK to fund against in general since it is owned and there will be semi-annual site visits?

1. Yes - this is the language used in the Authorization - Lender will have no obligation to advance funds under this Note if Lender determines: (a) there is any default as defined in this Note; (b) there has been an unremedied adverse change in the financial condition, organization, management, operation, or assets of Borrower which would warrant withholding or not making any further disbursement; (c) Borrower has used Loan funds for unauthorized purposes; or (d) Borrower has not complied with Lender's conditions for disbursement or other agreements. 2. Yes SOP 50 10 5(E) page 249 limit advances to the following types of inventory: (i) Finished Goods: Eligible if readily saleable and not obsolete. (ii) Work in Progress: Eligible if lender obtains SBAs prior written concurrence. (iii) Commodities or Raw Materials: Eligible

QUESTION: Can a 7a loan be used to fund the 1st Mortgage on a 504 loan? ANSWER: No.

QUESTION: We have a borrower that is working to purchase a property out of foreclosure. The defaulting party is in no way included in new ownership. However, XXX Bank (current lender) has offered to delay selling the property at sheriff sale if our borrower pays interest during the interim. As he believes he will be purchasing the property below market, he has agreed to do this (about $5,000 monthly). Can he recoup the interest payments he will make in the interim or can these be counted toward his 10% equity injection?

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ANSWER: I dont see any way for those costs to be eligible to be included in the project if they are just on an informal basis. If the payments were part of a purchase agreement, then it may be possible that they could may be eligible as part of the acquisition, but it is hard to tell and would require a complete loan application and documentation to determine.

SBA Loans: The Missing Manual

QUESTION: We have a borrower that entered into a Lease-to-Purchase agreement 5 years ago. He has never been late but is seeking to refinance this Seller Note as the business has now stabilized following a number of improvements he put into it over the last few years. I am not very experienced with Lease-to-Purchase and just wanted to make sure that, as it was a Seller Note and has been in place for greater than 2 yrs, that it is eligible. ANSWER: Did transfer of ownership take place? Generally under a lease-to-purchase agreement, a portion of the lease payment goes to the purchase price but the lessee does not own 100% of the company. Does the applicant own 100% of the business? If so, it is a refinance. If not, it may be an ineligible change of ownership. FOLLOW-UP QUESTION: [Attached the Lease to Purchase Agreement] ANSWER: No change of ownership has taken place. The buyer is leasing the property and personal property from the seller. FOLLOW-UP QUESTION: So could they then propose this as a business and real estate purchase once a purchase agreement is put together? ANSWER: So, as long as the buyer has not acquired any ownership interest in the business or real estate, yes, this would be the purchase of both.

QUESTION: If a seller note is used in lieu of cash equity at closing, does the term of the note need to match that of the SBA note or can it be shorter? Must it be on at least partial stand-by even if cash flows supports no stand-by to be counted as equity? ANSWER: It would have to be on full standby for 2 years.
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QUESTION: We have a borrower that is refinancing a number of loans (10) and many were used for mixed purposes (i.e., one loan where proceeds went to rolling stock and working capital, one loan where proceeds went to real estate refi and working capital, etc.). ? How do we need to document what the original use of proceeds were, besides a HUD-1 on the Real Estate components? ANSWER: If a copy of the original notes are not available, then since the borrower is certifying that the use of proceeds is eligible, that is going to have to suffice.

SBA Loans: The Missing Manual

QUESTION: We have a borrower that is purchasing a business. The use of proceeds (according to the Purchase Agreement) are Equipment ($200K), Inventory ($100K), and Goodwill ($300K). Can this be split into two SLA loans in order to reduce the turnaround time once submitted or must it be one done as one loan since it is really one transaction? ANSWER: You can do two separate loans under this program.

QUESTION: We have a borrower looking for a working capital loan of $75K which we are going to provide via SBA Express. Attached is the Franchise Agreement. Can we submit the Express request without a review of the Franchise Agreement? ANSWER: Lenders processing under delegated authority, such as 7a Express, are responsible for their own franchise reviews. Please provide the Franchise Agreement so that we can check against Franchise Registry for any addendums/revisions required for eligibility.

QUESTION: We have a borrower that is seeking a working capital term loan to start a settlements funding business. They receive assignment on legal settlements and then fund their clients based on these settlements, which have not been funded yet from the defending party. Attached is the Business Plan. Is this eligible or is it considered a lending business?

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ANSWER: Based on the Business Plan submitted, it is not eligible. While it is not ineligible under the lending language of SBA, the Business Plan states that some portion of the business will be derived from cases not yet settled and there is a high rate of return. For these reasons, it is considered a speculative business and is therefore not eligible for SBA. FOLLOW-UP QUESTION: The borrower has stated that their previous business has an SBA loan and performs the same exact services. Why was their previous loan eligible? ANSWER: It is likely that their previous loan was done by an SBA Preferred Lender. Preferred Lenders are not required to submit the same application as under General Processing. Had this Preferred Lender submitted under GP, it would have been reviewed, and SBA would have told them that the loan is ineligible.

SBA Loans: The Missing Manual

QUESTION: We have a potential borrower looking to buy a business. He will provide cash at closing toward the equity injection of 15% but would like to know if the seller accepted a note for some portion of the purchase price and the term of the SBA loan is 10 years, provided underwriting reflects sufficient cash flow to pay interest during the first two years (partial standby), can the note be on a 3 or 5 year term or must it be equal to the SBA term of 10 years? ANSWER: A short term is allowed if financially supported.

QUESTION: We have a borrower that is choosing not to purchase a new property through an RE HoldCo but rather in his personal name. Is this OK for SBA? ANSWER: It would still be an EPC/OC with the EPC being himself as an individual leasing to the operating company. That is eligible.

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QUESTION: We have a borrower that owns bar/restaurant Real Estate in his personal name and is seeking refinancing on it. He would rather not go through having to transfer it into a new EPC for an SBA loan so that transfer tax becomes an issue. Is it OK that the RE is owned by him personally? ANSWER: Yes.

SBA Loans: The Missing Manual

QUESTION: We have a borrower that is purchasing a new property and is unsure whether he wants to form an EPC. Is it acceptable that he acts as the EPC and is leasing 100% of the building to the OC? ANSWER: An individual can act as an EPC.

QUESTION: Is a 7a loan assumable if the business owner decides to sell in the future? ANSWER: Provided all eligibility requirements are met an SBA guaranteed loan is assumable.

QUESTION: We are working with carwash owners that purchased their property and business in 2008. Our question concerns liquidation values used to address whether personal assets need be secured. We are using liquidation value of 85% on CRE, 50% on Equipment and 0% on Business Value, which would mean we require personal assets be secured, if available. Is this correct or should the business value based on BV Report be given something greater than a 0% liquidation value? ANSWER: You are correct in your liquidation value discounts. SBA fully discounts the intangible value of the business when determining whether a loan is fully secured.

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QUESTION: We are working with a customer that financed the purchase of his business assets 5 years ago. The note is held in the personal name even though payments are made from the business. It is a business loan that was incorrectly placed in the personal name instead of the business name. If the borrowers CPA provides a letter stating that the loan has been transferred to the business balance sheet, is this documentation sufficient to consider it eligible for refinancing from the business/personal point of view? ANSWER: When determining the loans eligibility for refinance, you should look at the totality of factors to determine whether the loan can be proven to have been for business purposes. For instance, was the loans interest expense deducted on the business tax returns? Were payments on the note being made from the business checking account or the individuals? There should be some historical evidence to point to the business-related nature of the note in addition to the recent change made by the companys CPA.

SBA Loans: The Missing Manual

QUESTION: We are working with a borrower that is an architectural firm. Two partners bought the building in a real estate holdco a number of years ago. Partner B retired from the operating company a couple years ago so that Partner A is the sole owner of OpCo now. Partner A is now looking to purchase the 50% interest in the building he does not own from Partner B. Partner B is exiting completely from the Real Estate ownership as a result of this transaction. Specifically, that the total project amount is equal to the sum of the purchase price, debt refi, plus project costs and additionally, and subject to compliant appraisal, the equity from the purchasing partner used can be that recognized in his existing ownership of the building (He currently reflects $1.25 million in recognized equity for his 50% share of the building, but this is subject to appraisal). ANSWER: We cannot finance a partner buy-out directly; the 504 program cannot be used to purchase stock. A partnership interest, LLC membership etc. are all essentially the same thing. But we can participate in financing an asset sale when there is some common ownership between parties.

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Where a buyer already owns a part of a property:

SBA Loans: The Missing Manual

1. Typically the only way to make the transaction eligible for 504 financing is if there is a new entity purchasing the assets of a different entity. 2. The 504 Project must meet either job creation/retention criteria or a policy goal not now met by the business. If the buyer already owns a controlling interest, and is buying out a minority owner, qualifying 504 economic impact would appear to be quite unlikely. 3. Buyers equity in the real estate may be used as injection, if supported by appraisal at the time of application. 4. No loan funds (third party or 504) may go to buyer, so only the departing sellers interest in the property may be included in the proposed 504 and Third Party Loans. Amount of project loans is thus limited to the amount of debt plus the selling owners equity, based upon appraised value. 5. Previous debt secured by the project property may be retired from project proceeds as any sellers debt would be in a change of property ownership. This would not be treated as refinancing.

QUESTION: We are working with a borrower to refinance a loan used to finance a change in ownership several years ago. Is a current business valuation report required to be completed as the debt was used to finance the acquisition previously? ANSWER: Yes.

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QUESTION: Assuming all other eligibility and refi eligibility requirements are met, if a borrower has a $300K Mortgage outstanding and a different lender is interested in refinancing $250K of this through the 7a program and leaving $50K with the existing bank, can the new lender do this as long as he requires a shared 1st lien on the subject property with the $50K that remains? The new $250K loan will abide by the 10% payments reduction criterion and other eligibility requirements. ANSWER: Why would you want to refinance a portion of a mortgage? FOLLOW-UP: We are constrained by our legal lending limit so cannot do the full $300K refi. ANSWER: Yes, if it is Lending Limits that are the reasons for this situation.

SBA Loans: The Missing Manual

QUESTION: We are working with a borrower that has been misinformed by his previous lender as to where he was in their loan process. He is scheduled to close on Friday. We have not yet received a full loan package and have communicated to him that eligibility and credit still need to be assessed and then the application submitted for SBA authorization. He is planning to use cash available at another company he owns to close Friday. Our question is, assuming all other factors are ok, can the SBA loan be used to refi the monies injected at closing as they are not meant to be the perm financing? ANSWER: Use of loan proceeds from an SBA loan cannot be utilized to reimburse applicant as that is considered payment to an Associate, which is ineligible as per page 132 of SOP 50-10 5E and listed here: D. Business Loan Proceeds Restrictions: Loan proceeds may not be used for any of the following purposes (including the replacement of funds used or borrowed for any such purpose): (13 CFR 120.130) 1. Payments, distributions or loans to an Associate of the applicant except for compensation for services actually rendered at a fair and reasonable rate.

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QUESTION: We have a borrower where there will be a $450K TL, a $100K Express for general WC, and a $50k Express for startup expenses for a new business affiliated with the main OC. Borrower has a $500k existing Life Insurance policy that we said we need assignment of for the TL but are wondering if the policy can be assigned to all 3 loans. I know the Express guidelines on Life Insurance is per our policy for similarly-sized, non-SBA loans, but am unsure if we wanted assignment to the Express and TL, if this is feasible? ANSWER: There is a way you can do this, but you have to elect the rights of each loan. You could take the percentage of the policy and assign to each loan with the largest going to the term loan and then do an agreement that it will be shared with the idea that, as the lines go up and down, you only have it for that amount.

SBA Loans: The Missing Manual

QUESTION: We are working with a franchise hotel where franchisor has ability to purchase business of franchisee but franchise is pre-qualified as eligible on franchise registry. Is this sufficient for a succession plan and can this be used in lieu of assignment of life insurance? ANSWER: There is no set criteria how the CDC should determine the need for life insurance. As a practical matter, SBA rarely takes exception to the CDC's determination in this regard, as long as it is prudent.

QUESTION: If we offered a fixed rate guaranteed portion and floating rate unguaranteed portion, are two notes created and filed? ANSWER: There is only one Loan Authorization and it addresses both rates at the same time. As for the Note itself, both should be noted in the same note.

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QUESTION: We have a very small borrower looking to refinance credit card debt. The credit card is issued in the name of the business however the interest expense is not reported on Schedule C (it is a sole prop). As long as it is issued in the name of the business, this is eligible, correct? ANSWER: Yes, it is eligible.

SBA Loans: The Missing Manual

QUESTION: We have a borrower that has credit cards issued in her personal name that she is looking to refinance with SBA. If the interest expense is not listed on her business income statement, is it eligible? ANSWER: No. As it currently stands, if an individual took out a personal loan (i.e. the Note is in the name of the individual), and the proceeds of the loan were used for business purposes, and the debt has been reported on the business Balance Sheets and the interest on the debt has been reported on the business Income Statements (i.e. FTRs), it can be eligible for SBA refinancing. If, in this situation, the lender on the Note to be refinanced is willing to modify the Note to reflect the business as the borrower, the debt can be refinanced (and it is not an exception to policy). However, if the lender is not willing to modify the existing Note, it cannot be refinanced without first getting it approved as a policy exception by the folks in DC. Conversely, if an individual took out a personal loan to be used for business purposes, and the debt has not been reported on the business Balance Sheets or the interest on the debt has not been reported on the business Income Statements and business Tax Returns (or schedule C or F - in the case of a sole prop), it is highly unlikely to be deemed anything other than a personal loan and is not eligible for refinancing. Any consideration for refinancing such a debt would have to be sent to DC as a policy exception, and it is highly unlikely that it will be approved. Retroactively revising their financial statements to show it as a business debt is not acceptable.

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QUESTION: Is the 10% payment reduction requirement required for CA loans that are refinancing existing loans? ANSWER: Yes, a 10% reduction would be required just as it is in the Standard 7a loan program.

SBA Loans: The Missing Manual

QUESTION: Are payment transcripts required for loans being refinanced if it is not sameinstitution? ANSWER: Transcripts are only required if we are refinancing same institution debt.

QUESTION: Do copies of the appraisal and environmental reports need to be reviewed and approved by SBA prior to closing of a 7a loan? ANSWER: Yes.

QUESTION: We are working with a borrower that will have a collateral deficiency after all Business and Personal assets have been secured. We are requesting the pledge of his fathers investment property as additional collateral for the loan (though not required for SBA). Can the father pledge this collateral without becoming a guarantor for the loan? Would this fall under the limited guaranty model similar to when spouses sign a limited guaranty to the extent of their ownership in the primary residence? ANSWER: Yes, he can be considered a Limited Guarantor to the specific collateral pledged (very common). It is built into the SBA loan authorization as an option.

QUESTION: Is Goodwill an eligible use of proceeds for SBA when the borrower is buying a nonprofit business but will operate it as a for-profit going forward? ANSWER: Yes.

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QUESTION: We have a borrower that is purchasing a new, 2nd location. The first location, based on his PFS, reflects a value of $125K; there is $143K in loans secured by this location. He will be pledging an investment property to fully secure the loan in conjunction with the property being purchased. Are we required to have the borrower pledge the current location (where there is no equity)? I ask since, if he is required to pledge the current location, an additional Appraisal will be required to be ordered which increases his costs, and the pledge of the current location does not provide any additional security to the loan as it will be fully secured by the subject purchase and the investment property. ANSWER: If loan is fully secured based on the SBAs collateral criteria, you are OK, otherwise it must be taken to secure loan.

SBA Loans: The Missing Manual

QUESTION: We have a borrower that has had cardiac issues in the past and will be unable to obtain life insurance. He will provide documentation attesting to this as part of the loan application. He is 90% owner of the business. The loan is to purchase a new location for $1 million. As we are not fully secured, based on LV on this location, we have asked him to pledge an investment property owned free and clear. He owns two additional investment properties values at $1 million total. If he provides documentation on his inability to secure life insurance and all three investment properties are taken to support the collateral and life insurance requirements of SBA, is this sufficient to address SBAs collateral and life insurance requirements? ANSWER: Yes.

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