Dale hired new lenders for his SBA department, and engaged me to train them.  But he wasn’t able to attend any training sessions. So imagine his surprise when the loan officers started asking businesses for their organizational documents at application. How things went from there:

Dale. We always ask for org docs at closing, and don’t bother the borrower with these things at application. First, we need to make sure the business and the project are eligible and that cash flow supports the project. Then we get the rest of the application.

Senior Loan Officer Joyce. But Richard said to get the organizational documents at the time of application to make sure the business is eligible.

Dale. That’s just way too picky. Wish I’d taken that class. I would have straightened him out.

And the Saga Continues … A few months later Joyce sent me a screen out. She had worked for ages on a loan application for a boat manufacturer. The business had cash flow, collateral, and credit. The owners had just enough personal resources to add support to the deal, but not so much support that credit was available elsewhere. Everything was fine until Dale got the email from SBA:

We have carefully considered your request for a loan in the amount of $4,722,000.00 for Boat Maker LLC. We regret we are unable to approve your request for the following reason(s):  The loan is not eligible due to SBA policy. The size of the small business concern and affiliates cannot be adequately determined based on the information provided.”

Dale wasn’t happy and called Joyce into his office to discuss:

The Tale of Helen & Troy.  Troy owned 90% of the business and according to the K1s, he was the general manager. Helen owned 10% of the business. She wasn’t related to Troy and was just a member of the LLC. Everyone knew that Helen had invested in multiple companies. Yet since Helen’s ownership of the boat manufacturing business was small and Troy was the LLC Manager, Joyce hadn’t collected financials on the companies Helen owned. Dale was about to call the SLPC Call Center when Joyce suggested they give me a call.

I thought this was strange and asked what the company’s Operating Agreement said. These two very experienced SBA lenders had to admit they hadn’t read it. So I requested a copy. After reading it, I called them.

Richard. Take a look at Article VI of Operating Agreement: “The Manager of the LLC shall be elected by a 95% vote of the Members.” It appears that both Troy and Helen have the ability to be the Manager. So SBA deemed that Helen has control of Boat Makers LLC. That means that all entities in which she has an ownership interest must be reviewed for affiliation.

Dale. Oh no! We have to get taxes on all of them!!

Joyce. Hey, maybe not. First, let’s get the org docs on each entity in which Helen has an interest. Then we can get the taxes just on the ones she controls.

Dale. That’s a good idea, Joyce. In fact, let’s make it an ongoing policy to get and review organizational documents at the time of application to make sure the business is eligible.

I congratulated Dale on his most excellent idea and refrained from saying “I told you so.” It’s always a good thing when the client comes to the realization that the consultant was right to begin with!

Richard Jeffrey
Senior Associate, CDC/504 Programs