It’s been a roller coaster ride. Most of you remember when SBA required a ”Personal Resources Test” when a principal’s cash liquidity over a certain amount was considered “excessive” and an additional project contribution or additional equity injection was required.

Gone, but not forgotten. That test was removed a few SOPs ago, only to be briefly restored before being legislatively removed. However, its cameo appearance was well publicized and enshrined in Ventures. And at JRB, clients still ask us how much personal liquidity is “excessive.” Although there is no regulatory limit, some rules of thumb have been circulating that a principal’s liquidity is limited to one or two times the project financing.

The issue stems from good ol’ Credit Elsewhere: SBA’s requirement that the lender certify that the borrower doesn’t have the ability to obtain the requested funds from non-federal sources.  While that may be a noble requirement, saving scant federal resources from being loaned to Musk or Bezos or Gates, personal resources can mitigate loan losses. And indeed, their use is required in circumstances such as environmental clean-up.

When we were all much younger credit officers, we learned that a principal’s personal liquidity is yet another source of repayment. SOP 50 10 7 hasn’t been implemented, and until it is I’m reluctant to quote it verbatim. But here’s the gist: An applicant’s personal liquidity doesn’t preclude them from obtaining an SBA loan. And no Personal Resources Test is required. It isn’t required in 50 10 6 and there is no such test in 50 10 7.

What’s in your policy? As I review lenders’ credit policies for compliance with SBA requirements, I sometimes find that they include a Personal Resources Test. Have you got it in your policy? My advice if you do: Remove it from the policy.

Now, this doesn’t mean you’ll no longer be required to certify that borrowers don’t have the ability to obtain a loan from a non-federal source. Instead, you must so certify, citing one of the acceptable factors detailed in  the SOP.  I’m pretty sure you’ve committed most of them to memory. If not, check out pages 131-132 of SOP 50 10 6.

Hangin’ in until August 1, 2023 …

Richard Jeffrey
Senior Associate
Head Underwriter