We’ve spent a lot of time lately talking about how to increase your SBA loan portfolio through Green and Small Manufacturing 504s. Now one reader’s question calls us back to our roots.
Q: Hi Richard. We’re looking at a loan request where a 15% owner of the applicant business (Business A) also owns 60% of another business that has an SBA loan (Business B). Does the SBA loan he currently has count against SBA’s $5 Million cap?
A: Short answer: Maybe. Maybe not. Now for longer answer. Time to dig:
SBA limits SBA loans to $5 million to any small business concern, including its affiliates. So to answer your question, we must know if the two businesses are affiliates. We’re talking affiliates here – not associates and not guarantors. So the issue is one of control.
It’s pretty clear that the owner of 60% of a business has control. But we must dig deeper to determine if the person owning 15% of the applicant will have control of the applicant. Just based on the size of ownership interest it appears unlikely. But wait! The applicant business is an LLC with eight members.
As noted in SOP 50 10 5 (K), you must identify each owner of a business and their percentage of ownership on SBA Form 1919 and in the E-Tran system. (Subpart B, Chapter 6. I. pg. 221) SBA isn’t trying to make busy work here. It was trying to ensure that each applicant business was eligible. Let’s say that you get the list naming each member and determine that no one owner owns more than 50%. So far so good. Then you also discover that the manager of Business A is a close relative (parent, child, sibling, or spouse) of the 60% owner of Business B. Now you must dig deeper to rebut the presumption that Business A and Business B are affiliates by Identity of Interest. If you cannot rebut that, then yes, A and B are affiliates, and the SBA loan for Business B limits the potential SBA loan for business A.
Of course there are other ways in which the businesses could be affiliated. Perhaps the applicant business is a member-managed LLC. That would mean that the 15% owner has control of both Business A and Business B, and thus they are affiliates. Or perhaps the 15% owner has an option to purchase another 40% of Business A. They are affiliates. Or perhaps there’s going to be a management agreement whereby Business B will manage Business A. They are affiliates.
Q: Richard, I just asked a simple question! Does the SBA loan for Business B count against the maximum loan amount for Business A?
A: I know. My simple answer was “Maybe. Maybe not.” To answer your question, you’ll need to do a lot of digging. Translation: investigation. It’s a chore. I agree. But it’s better to do it now and clear up all eligibility issues than to wait for loan closing and discover, “Ooops! Can’t fund the loan! A and B are affiliated!”
Sometimes there are no easy answers. To dig or not to dig? I couldn’t resist. But anyhow: Question answered!! Keep ´em coming.
Associate, CDC/504 Programs