Our federal government’s Small Business Administration is unique around the globe – a government entity designed to boost local small business communities and the country’s economy with subsidized business loans. But things can get complicated when business ownership goes outside our country. Here’s a real life question from one of our clients: 

Q: Hi Richard. We have a client who is looking at doing an SBA loan. They’re a Canadian company with a U.S Subsidiary. I want to say that the SBA will still lend to the American subsidiary, but may require the guaranty of the local manager. Am I correct?

A: Hi Mike. Interesting question. Yes, the borrower would be the American firm and of course the Canadian entity would guaranty as would the owners of the Canadian firm. Yet SBA has specific requirements for foreign-owned businesses and for businesses owned by non-citizens and non-legal permanent residents. SBA’s requirements for percent of ownership, manager guaranty, contract term and collateral are in SOP 50 10 5 (J), Subpart B Iii c 8, page 114 for 7(a) loans and are repeated in Subpart C III c 8, page 292 for 504 loans.

One Quick Solution – Establish First. Here’s the only way to get around the requirements in the SOP: If the Canadian firm is owned at least 51% by a U.S. citizen or Legal Permanent Resident (LPR), then the SOP’s provisions listed below don’t apply. If this is the case, you can then treat the loan as any other SBA loan.

If the Quick Solution doesn’t apply? Then we really get into it! Here’s a recap:

  • The manager of the U.S. firm must have been managing the firm for at least a year, and yes, would have to guaranty the loan. The manager has to be expected to be in place indefinitely (that means no limited term contract) and the manager has to be a U.S. Citizen or LPR.
  • The applicant must pledge collateral within the jurisdiction of the U.S. with a liquidation value equal to no less than the approved loan amount at the time of first disbursement. And to the extent that the value of the collateral declines during the life of the loan, the lender must require the borrower to pledge additional collateral to ensure a sufficient collateral coverage amount.
  • If there is equipment with a depreciating value, the Canadian firm has to pledge additional collateral to ensure that the collateral value is equal to the outstanding balance of the loan through the entire term. In other words, if the collateral declines in value – think back to what happened to real estate values in 2008 – the borrower has to have pledged the shortfall. Cash is the only collateral I can think of that maintains its liquidation value for the term of a loan: Cash. Good old American cash.
  • The other implication of that requirement is that if the loan is a 7(a) loan, the liquidation value of the collateral has to at least equal the loan amount. The SBA definition of “fully secured” does not apply here. The liquidation value of the collateral has to equal the loan at the time of first disbursement AND throughout the life of the loan.

So there you have it. I hope this information has helped. I’ll be covering other instances of loans to companies outside the USA in future eBulletins. In the meantime, feel free to contact me with your stories and questions! Contact JRB

Richard Jeffrey
Associate, CDC/504 Programs
J.R. Bruno & Associates