If you know me, you know I’m always ready to hear a joke. But this old thing. Really? Of course it led to a 504 situation.
Joe Lender. Richard: Four guys walked into a bar…
Me. Um, yeah. I think I’ve heard this one.
Joe Lender. I know I gave you a corny opening, but this is no joke. Four guys came to us after they walked into a bar and decided to buy it. They already have a 504 loan for a bar in another state, and now want to buy one here.
Me. Okay. That’s a typical use of the SBA’s 504 loan program. What’s your question?
Joe Lender. One guy will own 52% of the business and the other three will each own. 16%. The TPL wants to take the personal guarantees of all of them. But we aren’t required to take personal guarantees on anyone owning less than 20% of a business, correct?”
Me. The SOP doesn’t require you to get the guaranty of someone who owns less than 20% of the business. But SBA may require the guaranty of anyone – regardless of the amount of ownership interest – and even if that person has 0% ownership. It’s a credit issue. (SOP 50 10 5 (K), Subpart C, Chapter 2, III. pg. 307* You might want those guarantees too. After all, the bank is getting them but you’re the one with more exposure.
Joe Lender. So what if we do take them as guarantors? Getting their personal financial statements is the only requirement I can find for guarantors. Nothing says we have to get their personal tax return. Do we have to get those?
Me. SBA requires a copy of the most recent Federal Income Tax Return from everyone who owns 20% or more of the EPC or OC. If a guarantor owns less than 20% then, no, you don’t need their most recent income tax return. Yet if you ever have to collect on the guaranty, you may want to have financial statements or tax returns to show a judge that yes, indeed, you relied on that person to repay the loan. But it is not an SBA requirement.
Joe Lender. What about other businesses these guys might own? Do I have to ask them for information about potential affiliates?”
Me. Not at all. Remember, affiliation is about control, not percentage of ownership. If someone doesn’t control your borrower, then the company they own is probably not an affiliate.
Joe Lender. Cool. I have my work cut out for me, but not as much as I thought.
Me. Any time. Always nice to make things easier for four guys – and you!
Senior Associate, CDC/504 Programs
*SBA Information Notice 5000-20043 announces the new SOP 50 10 6, effective October 1, 2020. In the new SOP, items that are the same for 504 and 7(a) loans will be in the same section with no need to repeat elsewhere.