Hot-Button Issue Getting Hotter! SBA means business. Back in March we alerted you to SBA’s first-time language addressing retail marijuana-businesses. See SOP 50 10 5 (J) (1/1/18). Subpart B, Chapter 2, V. Eligible Use of Loan Proceeds, F, 1, g, pg. 131:
“During the life of the loan, a borrower may not lease space to any business engaged in any activity that is illegal under federal, state or local law (such as a marijuana dispensary).”
See also: Subpart B, Chapter 2, III. A. 8. pg. 101, Businesses Engaged in any Illegal Activity [13 CFR § 120.110 (h)] providing that businesses engaged in any activity illegal under federal, state or local law are ineligible for SBA financial assistance. Because federal law overrides state and local law, SBA clarifying eligibility and conforming to new Department of Justice directives became necessary as more states made marijuana sales legal.
We advised you to stay tuned. Next up: SBA Policy Notice #5000-17057 (4/3/18) provides additional guidance defining marijuana-related businesses which it broadly defines as Direct Marijuana Business, Indirect Marijuana Business, and Hemp-Related Business. This guidance applies to 7(a) and 504 loans:
“Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana may be ineligible for SBA financial assistance.”
Key-Critical: Read this Notice thoroughly. Business definitions are very broad.
Now what? As a result of Policy Notice 5000-17057 SBA has updated SBA One as of June 15 to include new questions in the Eligibility Section:
- Is the Applicant in a Direct Marijuana Business?
- Is the Applicant engaged in an Indirect Marijuana Business?
- Is the Applicant engaged in a Hemp-Related Business?
As the lender, what does this mean for you? As of today’s publishing, these questions don’t translate to the Form 1920 section requiring the lender’s signature. Yet as the entity providing the information to SBA, how do you verify the borrower’s answers?
Our Recommendations. First, develop a certification form covering these items for the borrower to read and sign at the time of application. Then, include in your processes and procedures some due diligence items to verify the borrower’s certification, e.g., Review the borrower’s website and accounts receivable for any indication of marijuana industry; also a regular Google search might reflect industry-related news or advertising activity.
Finally, document your due diligence in your credit memo and back it up with supporting printouts/screen shots in your file.
Until Federal Law allows legal sale of marijuana, this is still an eligibility hot button regardless of your state law. Protect your guaranty: Familiarize yourself with SOP 50 10 5 (J) and Policy Notice 5000-17057!