Tip of the Week
Working with the New (and old) SBA Size Standards
A popular expression these days is "don't waste the opportunity of a crisis". It appears that many in the Obama administration have embraced that approach. As it relates to SBA lending, we have seen several major announcements recently that should practically impact the lending programs, we believe for the good.
On May 5, 2009 SBA published Information Notice 5000-1104 New Alternative Size Standard for 7(a) Loans. The size standard governing eligibility for 7(a) from 13 CFR part 121.301 has been temporarily amended to provide a new alternative size standard until September 30, 2010. Like most in the industry, we sincerely hope that this rule will become permanent. At least this is a good step in the right direction now.
The new alternative size standard 7(a) loan applicants is the same as that for 504 loan applicants and is described as follows:
"Including its affliates:
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tangible net worth not in excess of $8.5 million, and
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average net income after Federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years not in excess of $3.0 million."
This is the size standard "level playing field" that many in both the 504 and 7(a) industries have called for. Isn't it odd to qualify a small business as "small" under the 504 program but then disqualify them as "large" if they needed working capital under the 7(a) program (same Agency, right?) This is just one of many of the justifications for the increase. And while, historically, there have beenincreases in the old 7(a) standards based on revenues or numbers of employees, most small business advocates would argue that those increases weren't adequate to adjust for inflation.
As a practical matter, this is good news for both borrowers and lenders. This rule change simplifies and streamlines the qualifying process as it relates to size. However, it is important to note that lenders must still have an effective process for qualifying and documenting the aggregate size of the small business and all affiliates to be sure the borrower is eligible for SBA assistance based on size. All other eligibility requirements remain in place.
Whether the 7(a) or the alternative size standard is used, both require the lender to determine if affiliates exist (because the size standard applies to BOTH the applicant AND their affiliates). When determining if the applicant has affiliates, consider the following steps:
A. Determine who has "power of control" based on ownership % or by agreement
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SBA considers 50% ownership as being the power to control; however, control can arise with less than 50% ownership if a block of stock is large compared with other oustanding stock.
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Power may be also given to an owner by agreement - check Bylaws, Partnership agreements (regardless of ownership %).
If any owners who have power in the applicant business AND also have power in other businesses, then those businesses are affiliates of one another.
B. Determine if an "identity of interest" exists (what is the role between companies):
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Affliation can arise through common facilities, common management, joint ventures, stock options and agreements to merge.
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Is the applicant business owned by persons owning businesses in the same industry? If so, do they buy/sell from one another? Do they take advantage of economies of scale when using suppliers and vendors? If yes to any of these questions, those businesses may be affiliates of one another.
Also, with the issuance of SOP 50 10 5 (A), the lender may request a formal size or affiliation determination from the Government Contracting Area Director serving the area in which the headquarters of the applicant is located.
No doubt, 7(a) lenders will be choosing the new alternative size standard over the more complex NAICS code (13 CFR, Part 121) approach, while it lasts. SBA should be applauded for amending the rules now to help ease credit to small business and make the programs more readily available to more and more businesses that are effectively small businesses by most definitions. However, if you are using the more complex 7(a) approach, you may want to purchase our job aide called the "7(a) Size Standard Determination Cheat Sheet".
At sbaAccess, we help clients sort through the maze of rules everyday either with a quick answer to a question through our Lifeline (on call consultancy) Service or perhaps just with a purchase of a job aide we continually develop for our existing clients. Call or email us today for a free consultation on how we might be able to assist you and your team with these types of issues and make your SBA lending operation efficient and SBA "proof".
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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