FROM RICHARD JEFFREY @ JRB …
In a recent eBulletin we took a look at a case study involving two “associates” and what they went through to make SBA construction and 504 loans work for their project. Rough waters all the way around. There could have been smooth sailing if these applicants had been up to speed on SBA’s “Associate Rules” and how they would affect their plans. Here are some guidelines:
Be proactive. Before sending a loan application to SBA, knowing ahead of time who the “associates” of a small business are can save you lots of time. And it’s critical at the time of liquidation to have a proper analysis of “associates” in your original underwriting.
Be clear on SBA’s definitions. SBA spells out what it means by “Associate of a small business” in 13 CFR 120.10 (2):
(i) An officer, director, owner of more than 20% of the equity, or a key employee of the small business;
(ii) Any entity in which one or more individuals referred to above owns or controls at least 20 percent; and
(iii) Any individual or entity in control of or controlled by the small business.
Don’t get confused. One threshold for determining an affiliate is control of 51% of the voting equity. The threshold for determining a guarantor is who owns 20% or more of the borrower. But an associate is an officer, director, or a key employee even if that person has no ownership interest at all. There are very few connections among guarantors, affiliates and associates. A person may be all three, or two, or just one of them.
For your reference. Here are some handy tips on dealing with situations involving associates:
- The applicant and its associates must be of good character. That means a Form 912 or a Form 1919 on each associate must accompany the application.
- Credit Available Elsewhere: The lender must determine that all or some of the requested loan is not available from the liquidity of an associate. Better get a 413 personal financial statement from the associate too.
- SBA prohibits payments, distributions or loans to an associate. So what if an officer of a small business happens to be the seller of real estate being financed by an SBA loan? Whoops! That’s not allowed. SBA has applied this rule to real estate being sold by a company in which an officer, director or key employee is also an officer, director or key employee of the buyer.
- It’s important in a real estate or machinery purchase project to know the officers, directors and key employees of your applicant and make sure they have no similar role with the seller. The businesses might not be affiliates, but they sure are associates.
- In a 504 loan, an associate may not be an interim lender: Neither an owner of more than 20% of the business nor an officer, director or key employee can provide the funds to be taken out by the 504 loan.
- Unless waived by SBA a loan cannot be made if an associate or a business controlled by an associate has a delinquent federal debt.
- Debt due to an associate may not be refinanced with SBA loans.
Keep in mind. It’s helpful to know that an associate’s other SBA loans do not affect the SBA loan ceiling of $5 million to an applicant’s business. SBA loans to an associate do not have to be calculated. But loans to an affiliate do require calculation.
An associate relationship begins six months before the date of application to SBA, the lender or the CDC. If you find yourself dealing with an issue caused by your applicant’s associates, having the associates resign as officers or directors, or having then reduce their ownership percentage solves the issue. Yet due to the six month rule, you might have to wait six months before submitting the application.
So what did I say? It’s best to determine associates early on in the process to better manage your applicant’s expectations!
Associate, CDC/504 Programs
J.R. Bruno & Associates