Here I go. Looking to an ancient sage for answers. Heraclitus, the Greek philosopher, is credited with saying “No man ever steps in the same river twice, for it’s not the same river and he’s not the same man.” In plain English: The world constantly changes and no two situations are exactly the same. Obviously Heraclitus never ran into the Personal Resources test.
Taking a deep look at the Test. The Personal Resources Test seems pretty cut and dried, yet there are some interesting nuances. For example, we may call it the “personal” resources test, but it applies to any owner of 20% or more of the applicant. So if a business or a trust or any other entity owns 20% or more, the test is applicable. It’s tempting to say that the test applies to all guarantors. Yet if you require the guarantee of an owner of less than 20%, the test doesn’t apply to that person.
The Total Financing Package. It is important to note that liquidity thresholds are based on the size of the “total financing package.” That package is defined as “any SBA loans and any other financing, including loans from any other source, requested by the Applicant business at or about the same time.” To be sure we all know what “about the same time” means, SBA refers us to the SOP. The SOP doesn’t explicitly say it, so we turn back to the rule itself which says “about the same time” means within 90 days of the date of an application. So, the threshold is based on the amount of financing requested by the applicant at the time of application plus any other financing requested by the applicant within 90 days of the application.
Do we mean the whole enchilada? We aren’t just talking about the amount of SBA financing. We’re talking about the total financing the applicant requested within 90 days of the date of the SBA application. This includes the amount of any third-party loan in a 504 project and the equity contribution. It also includes any other financing the applicant applied for, regardless of whether the other financing was an SBA loan, and regardless of whether the other loan had any relationship to the proposed financing. Here’s an example: Less than 90 days prior to the date of an SBA application, the applicant business applied for a car loan. On the surface, it looks like the car loan should be included in the calculation of total financing package.
Also note that we are just talking about loans applied for by the applicant, which means the small business concern (EPC and OC). But it doesn’t mean loans applied for by the owners of the applicant. So if the owners of the business – but not the business itself – applied for that car loan, it isn’t considered part of the total financing package.
Our recommendation. You might want to include a question in your loan application asking if the applicant business has applied for any other financing within the last 90 days. You will be looking for loans applied for, not just loans approved.
Liquid Assets Requirement. What’s in. What’s out. The test requires that liquid assets in excess of certain thresholds be contributed to the financing package:
What’s in: Within the regulations, SBA defines “liquid assets” as being the usual suspects (savings accounts, CDs, stocks, bonds, or other similar assets). Included are the assets of the applicant’s spouse and minor children (yet another regulatory reason to require spousal signature on that personal financial statement).
What’s out: Excluded from this list is Cash Surrender Value of Life Insurance. The new regulations don’t specifically exclude retirement accounts as the old regulations did. However, SBA promises to provide examples of liquid assets in the future, and maybe that issue will be addressed by the future examples. Until then, we wait for examples of liquid assets with great excitement.
Senior Associate, CDC/504 Program