“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”  

Leave it to Lewis Carrol’s Alice in Wonderland to come up with that. It sure confused little Alice. You know me. And you know I was once an English teacher and am a devotee of English literature. So you won’t find it at all strange that I sometimes repeat this quotation as I read the SOP. Does a term mean exactly what it says? Or what the SOP chooses it to mean?

Take the requirement that an SBA loan be “fully secured.” Let’s clear up any confusion:

A novice lender would assume this means that, for every dollar loaned, SBA requires an equal amount in collateral. But SBA views things differently. “An equal amount in collateral” doesn’t square with the Agency’s  policy that “A loan request is not to be declined solely on the basis of inadequate collateral.” (SOP 50 10 7.1 p. 113)

Instead, the SBA defines what “fully secured” means in the SOP:

“SBA considers a loan as “fully secured” if the Lender has taken security interests in all assets being acquired, refinanced, or improved with the 7(a) loan and available fixed assets of the Applicant with a combined Net Book Value as adjusted … up to the loan amount. For 7(a) loans, the term “fixed assets” means real estate, including land and structures, machinery, and equipment owned by the business or an EPC.” (SOP 50 10 7.1, p. 113)

Although the SOP refers here to “Net Book Value,” 1 in actual practice if there is a current appraisal value we use it, not the purchase price dating from when Edison first bought tungsten.

But, hold on! Determining Net Book Value is only half the requirement. As an SBA lender, you must then discount the value to certain percentages to perform the calculation leading to a determination of “fully secured.”

You know how to adjust it: 75% of the price for new equipment; 50% of book value for used equipment; 85% of market value for improved real estate; 50% of market value for unimproved real estate. If the adjusted value is equal to or more than the requested loan amount, the loan is fully secured.

But what if the adjusted value is less than the requested loan amount? Well then, if there’s a collateral shortfall, you’re required to take a lien on residential and investment property, and on trading assets as necessary, but only if the equity in the residential or investment property is 25% or more. (SOP 50 10 7.1 p. 114)

And how do you determine that equity? The SOP doesn’t require an appraisal, but it rules out using a stated value from the principal’s PFS. And the SOP requires you to document the source determining less than 25% equity in your loan file. Sometimes an appraisal is the surest source.

So now go tell Humpty Dumpty to stop being so scornful. He isn’t the only one whose word is just what he chooses it to mean! Riddle solved.

Richard Jeffrey, Senior Associate
Head Underwriter


1 Defined as “An asset’s original price minus depreciation and amortization.” (SOP 50 10 7.1 p. 363)