Defining “Need.” How many times have you heard a business tell you how much they really “need” that loan? We all know that SBA requires businesses to demonstrate the need for the loan. I’ve been lending a long time now and I’ve never had a business tell me it doesn’t “need” the loan it’s applying for.
So it’s a good thing that the new SOP provides some details to help everyone out:
13 CFR § 120.10 requires: “…the SBA Lender or CDC to certify or otherwise show that the desired credit is unavailable to the applicant on reasonable terms and conditions from non-federal, non-state, and non-local government sources without SBA assistance. It goes on to list factors the lender or the CDC may consider:
- The business industry of the applicant;
- whether the loan applicant has been in operation two years or less;
- the adequacy of collateral available to secure the loan;
- the loan term necessary to reasonably ensure repayment of the loan from actual or projected business cash flow;
- and any other factor relating to the particular loan application that cannot be overcome except through obtaining a Federal loan guarantee under prudent lending standards.
And there’s more. Some teeth to this requirement: If the SBA lender fails to adequately address this in the credit memo, SBA may decline the application, deny liability if processed by a PLP lender. Or in the case of 504 loans, pursue a recovery claim against the CDC.  Ouch!
Take Note: SBA requires the CDC to certify or show that credit is not available elsewhere. Most CC’s show that by providing a letter from the TPL listing the reason the TPL would not do the loan except for SBA participation. OK so far.
Now the SOP requires you to make two certifications regarding Credit Elsewhere. The first certification is the one above: Credit not available without SBA assistance, etc. Here’s your second certification! “What’s that?” you ask. Well it’s just the other one that says you must include in your credit memo:
“A determination that some or all of the loan is not available from any of these sources:
- The liquidity of owners of 20% or more of the equity of the applicant, their spouses and minor children, and the applicant itself; or
- Conventional lenders or other non-federal, non-state, or non-local government sources of credit including the SBA Lender, and for 504 loans, the Third Party Lender Note: This includes any commitment by a third party to provide financial assistance to the applicant in the event of a delinquency or default on a payment (e.g., a commitment by a franchisor or licensor to provide financial assistance to the franchisee or licensee).”
Get the difference? The first certification is that the borrower’s industry, or cash flow or collateral is just not good enough for a conventional loan. The second certifies that none of the owners of the business, nor their spouses or children, or any other conventional or government lender would ever be willing to lend the business money.
Not one, but TWO. So SBA requires you to have TWO certifications regarding credit not available elsewhere. And if you don’t have both, remember what happens? SBA may pursue a recovery claim against the CDC which is a very big deal after all!
Stay on the safe side. Make sure you have both certifications in your credit memo!!
We’ll be looking at more aspects if SOP 50 10 6 in future eBulletins.
In the meantime, keep those questions coming in. And stay safe.
Senior Associate CDC/504 Programs
 SOP 5010 6 page 131