Another look at SBA Notice 5000-20003. Like most SBA lenders, you’ve probably been focused on the Return of the Personal Resource Test. It’s big news. Yet there’s more to SBA Notice 5000-20003.
Bet you noticed that the Affiliation Rules in the Notice looked awfully familiar. You’re right. Some of the affiliation rules removed in 2016 are back after a hiatus of just over two years. But just when you get a sense of déjà vu – you see a slight, oh so slight variation.
What’s New? Affiliation Due to Economic Dependency? This whole section isn’t entirely new. You saw it in 2015. Then it was gone in 2016. Now it’s back, as of this Notice, dated March 11, 2020 and not yet on SBA’s website. Back in the day, it was in 13 CFR 121.103.f. I know you will excuse me for not having a current version of 13 CFR (changing rapidly these days) but SBA Notice 5000-20003 refers us to right around there in the CFR.
What’s new is that “economic dependency” is now defined as “one concern deriving more than 85% of its receipts over the previous three fiscal years from a contractual relationship with another concern.” This definition may not end all discussion but it should help avoid those many arguments about how a concern is dependent on another. If 85% of the revenue over the last three fiscal years is derived from another concern, they’re affiliated due to economic dependency. And that settles that.
Affiliation of Newly Organized Concern(s) makes a comeback too. Let’s walk through this. The owners of Business A, organized in 1999, form Business B in the same industry, opening in 2019. Business A loaned money to business B. Maybe the loan was for the required equity contribution, Maybe it was for working capital. The use of funds doesn’t matter. SBA is looking for “a clear line of fracture between the two concerns.” Yet if Business B owes money to Business A well then, there isn’t a “clear fracture” between the two. The new business is affiliated with the existing business.
It’s easy to overlook that this section, though related to new concerns, also applies to existing businesses. Let’s say Tim’s Car Care and Alice’s Auto Parts both own Superbug Car Wash. Superbug wants to build a new building, but it cannot get an SBA loan because Alice’s Auto Parts exceeds the size standards. So Alice sells its interest to Tim’s Car Care. Tim’s Car Care and Superbug are each small, now that Alice’s Auto Parts is no longer an owner.
Case closed. Right?
Of Course, There’s More. When Tim’s Car Care bought out Alice’s Auto Parts, Alice’s Auto carried the financing. So we see the money flowing from Superbug Car Wash-to-Tim’s Car Care-to Alice’s Auto Parts. Not a clean fracture! Superbug is still affiliated with Alice’s Auto Parts. End of story.
Just Around the Corner … At JRB we work consistently to keep abreast of these ever-evolving important changes. Just remember! We have a new SOP coming soon. Will it change, expand or modify anything in the Notices? We’re sure of one thing: When the new SOP comes out, our team will be scouring it for all the exciting changes – and recap our thoughts to you.