Tip of the Week
Going with the Flow - Digesting the Revised SOP 50 10 5 B
SBA is at it again - revising and fine tuning the procedures and requirements for processing a SBA loan application (qualifying the borrower). The newest version of the SOP 50 10 is out and it will be officially effective on October 1, 2009. You can find the updated document on our website by clicking here. We think the industry has been waiting on a few key changes since version A went into effect some six months ago, and we are encouraged to find that SBA has addressed many of our concerns. A few "meaty" revisions include:
However, SBA is approaching their concern with lenders who finance intangible assets, a bit differently with this new version of the SOP. Now the issue is more broadly approached by mandating how the loan application is processed (PLP vs. non-PLP). It is NOT whether the lender can finance intangible assets or not. SBA wants to take a look at the transaction if there is an excessive amount of intangible assets included in the purchase price of a business financed with a SBA loan. (see page 142 of the new SOP).
The new verbiage states: if the purchase price of the business includes intangible assets (including goodwill, client/customer lists, patents, copyrights, trademarks and agreements no to compete, etc.) in excess of $500,000, the borrower and/or seller must provide an equity injection of at least 25% of the purchase price of the business if the lender would like to submit the application through the PLP process.
If the borrower and/or the seller (combined) are not contributing at least 25% equity (and the intangible assets exceed $500,000), then the loan application must be submitted through non-PLP processes (through the Standard 7(a) Loan Guaranty Processing Center).
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Refinancing Seller Debt - Recently, lenders have expressed concern about how SBA expects them to apply requirements when it comes to refinancing existing debt, when that debt was originally used to purchase a business. Is a new business valuation required? Will the SBA expect the lender to have the seller's historical financial information (no matter how long ago the business acquisition occurred)?
The revised SOP provides more detail for lenders when determining what SBA will expect in the file when refinancing seller debt. The lender may consider refinancing seller take-back financing with a SBA loan if it has been in place for at least 24 months following the change of ownership and has been current for the past 24 months. If a business valuation was completed in the last 36 months, a new business valuation will not be required. The debt to be refinanced must still meet SBA's cash flow improvement rule (see next bullet) and be justified as to why the seller debt is unreasonable. (Page 142 of the new SOP).
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Refinancing Long Term debt - This is an interesting and timely topic and we believe the changes are very progressive on SBA's part. Prior to this new version, SBA required that in order to refinance long-term debt, there had to be a substantial benefit to the borrower (because SBA already provides long-term financing and if the borrower already had it, why did they need SBA? But we digress). Substantial benefit meant that the new SBA loan payment had to be at least 20% less than what the borrower was paying.
The revised SOP now reduces that requirement payment improvement down to 10% (and that is an overall improvement amount when refinancing multiple long-term notes). Remember, long-term debt does not include balloon notes (even on a long-term amortized note), business credit card debt, interest only notes and lines of credit. (Page 136 of the revised SOP)
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Refinancing Credit Card Debt - SBA probably gets many questions on how the lender should document "business purpose" when refinancing credit card debt. SBA has always recognized that credit card debt is unreasonable when financing the needs of a small business and, therefore, it is considered short-term debt that does not have to meet the 20% (10% starting next month) improvement to the payment amount. However, can the lender refinance a "personal" credit card (in the person's name) if that credit card was actually used for business purposes?
The revised SOP indicates the borrower must certify that the credit card debt being refinanced was incurred exclusively for business purposes.
If the credit card is in the name of the business and that credit card was used for personal reasons (in addition to transactions made for the business), the business applicant must specifically identify which purchases were used for personal reasons and that amount must be deducted from the balance before applying for the SBA loan.
If the credit card is issued to an individual personally, the lender must confirm and document which of the credit card obligations were used for business-related purposes. Documentation required includes a copy of the credit card statement and individual receipts for any business expenses in excess of $100. (Page 137 of the new SOP). Keep in mind these rules apply to standard 7(a) loans only, and the Express loan programs have more flexible rules around credit card documentation.
With the revised SOP, SBA now states that the Agency will periodically publish the maximum allowable fixed rate in the Federal Register. The maximum allowable fixed rate will be based on the cost of converting a floating rate note to a fixed rate note using the LIBOR Swap Rate. (page 154 of the revised SOP).
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Personal assets taken as Collateral - for the loan to be considered "fully secured" by SBA, it is expected that the lender take ALL available assets (including business and personal assets) where the liquidation value of the assets equals or exceeds the SBA loan amount. SBA included in personal assets publically traded stocks, mutual funds, certificates of deposit, investment property, etc. to meet those requirements.
SBA has softened its requirement on taking marketable securities as collateral. Hooray! Lenders have had a "dickens of a time" obtaining those liens. Now SBA says the lender must attempt to obtain a lien on these assets if the loan is not fully secured, BUT if the lender is unable to perfect a lien on these assets, the lender must document its file as to the steps taken to obtain the lend and include any supporting documents.
We are very well satisfied with the changes made by the newest version of the SOP 50 10 as it impacts 7(a) lending. SBA really appears to be trying to work with the lending community to make the program requirements as palatable as possible, while promoting (and requiring) prudent lending standards. Good for SBA! You may want to take a look at SBA Information Notice 5000-1121, which provides a bulleted list of the key changes made with the SOP 50 10 5 B .
There is much more to digest with the reading of this new document and we plan to update our SOP 50 10 summary/index for our clients in the next few days (it will become available in our Special Access area on our website late next week). Also, Karen will be available to debrief the SOP changes with you on a Coleman Publishing audio conference next Wednesday (September 9) at 2:00 p.m. EST. at http://www.colemanpublishing.com/public/998.cfm
SBA lending is never boring, that is for sure! Let us help you work through the trips and traps of the ever changing SBA loan programs - it is our specialty and we would love to become your partner in making your SBA lending program the best that it can be through training, consultation or one-on-one consultation.
Take the Right Approach
Karen McHugh and Brian Burke
SBA Access ©2009 - All Rights Reserved
All content is copyrighted and unauthorized use is strictly prohibited. If you would like to quote any part of this text, email bburke@sbaaccess.com or kmchugh@sbaaccess.com for permission.
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