Nearly every CDC Exec I talk to these days tells me it’s taking longer to get their loans approved. No wonder. What with COVID and the disruption in the workplace, pent up expansion needs and low interest rates, loan angst is high. Big time.

Then of course, some CDCs are exploring new ways to do business: Margie, an experienced loan officer, sent me an email the other day with a simple question that had a solution more complex than it appeared at first. She has an applicant who is about to lose his rate lock if it’s not funded in about two weeks.

MARGIE. The proposed third-party lender wants to know if it’s OK to fund its permanent loan and do a bridge loan on the 504 portion before our CDC submits the application. Or do both loans need to be a short-term bridge?

ME. Creative problem solving is a coping mechanism in times of high stress. You’re suggesting that the TPL fund its 50% and the presumed 40% before the authorization is issued. There really is nothing wrong with doing it that way. Of course the TPL should realize there would be a risk that the 504 loan would not be approved, in which case the TPL will be hanging out there with no guarantee of a take out. I’m not sure what the regulators would say about that. But from a 504- compliance standpoint, it looks OK. And to make sure the TPL loan meets the requirements for permanent financing, I would want the TPL to have a loan term longer than ten years.

Problem solved? Not so fast. This structure has another implication. SBA defines interim financing as:

 “… any disbursement of funds (other than the Borrower’s contribution) to finance eligible project costs after the loan is approved by SBA but before the debenture is sold” (SOP 50 10 6 Appendix 3, Interim Financing pg. 530).

If the lender starts disbursing funds before SBA has approved the loan, as would be the case here, those disbursements would not be interim financing. Who cares? You should. As you know, repayment of interim financing is an eligible project cost. But if there’s no interim loan, guess what? There’s no interim financing, which means the loan cannot be taken out by the 504. And that portion of the interest cannot be included in the eligible project cost. Good grief! More angst for you.

But your angst can easily be remedied. Just make sure that the date of the interim note and of the interim loan disbursements are after the date of your authorization. Otherwise in the strictest interpretation of the SOP, funds disbursed would not meet the definition of interim financing … and could not be taken out by a 504. Argh!

Yet the strictest interpretation might not be the most likely one. Or is it?  And is that yet more angst? As to the solution, I’ve said it looks OK, although there are issues. This situation is stressful to go through. Yet we know the sun will come out. It always does somehow.

Richard Jeffrey
Senior Associate