Our client Q&A sessions just keep rolling! Answers to questions often draw new questions from other clients. Recently we answered a question about a business that was owned more than 50% by a citizen of a foreign country. That answer drew a question from another client. Here goes:

Q: Hi Richard. We’re looking at a 504 project where the ownership is 50% U.S. citizen and 50% foreign owner. Is there any way to get around having the 50% foreign owner guarantee the loan? The Third Party Lender sees no reason for the foreign owner to guarantee or sign on the loan because they feel they would never be able to collect on the guarantee of an owner in India. In our case, the foreign owner has a U.S. Tax ID Number.

A: Short answer: “No way around it. Any owner of 20% or more interest must guarantee an SBA loan.” (SOP 50 10 5 J Subpart C, III I E.1 for 504 loans); SOP 50 10 5 J Subpart B II A. i for 7(a) loans) But there’s a lot more to that question.

First the TPL may very well be right. The guaranty of a foreign national may not add one single bit to the credit. And trying to collect on a default is difficult because it would require filing a collection action in the foreign country. Most foreign courts wouldn’t consider putting such a collection case on their docket. Even if you were able to get a judgment in a foreign court, collecting would be costly. That’s why most lenders don’t bother with a guaranty from a foreign national for regular commercial loans.

 But SBA allows no exceptions. You own 20%. You guarantee the loan. It doesn’t matter if you’re a resident of Main Town USA or Main Town Foreign Land. You must guarantee the loan.

Not only that: The 504 or 7(a) lender must underwrite the guarantor. That means getting the tax returns for the requisite number of years the foreign owner filed in their country. If the returns aren’t in English, then, multi-linguist that you are, you must translate them. Or of course pay a translator. And since the returns are in foreign currency, guess what?  You must convert the amounts on the taxes to U.S. dollars at the prevailing conversion rates on the dates of the returns.

And if the guarantor owns other businesses? That’s right! Meet your old friend Affiliation Analysis!!

Besides all that, there’s no requirement for the CDC and the TPL to have exactly the same collateral or the same guarantors. SBA has more exposure than does the TPL. So SBA might require guarantors that aren’t required by the TPL. Or require more collateral than the TPL. It is up to the CDC/SBA as to who guarantees the loan and what collateral is hypothecated. The TPL might laugh when you require a foreign guaranty. But that’s the only way the TPL will be able to offer its client the benefits of a 504 loan.

More questions out there? Keep ‘em coming!

Richard Jeffrey
Associate, CDC/504 Programs
richard@jrbassoc.com