Refinancing Credit Card Debt

 

Q: I have a request in which part of the loan proceeds will go toward credit card refinancing, where the credit card is in the personal name of the business owner.  I have read the SOP regarding this issue and have some questions.I have always taekn the stance that it is so hard to meet SBA's requirements in this area that I have refused to include this in the proceeds of any loan, mainly because it seems like it's just too easy to make a mistake and jeopardize a guarantee.

The SOP requires that we get receipts (I assume invoices and corresponding charges on credit card statements are ok, too) to support the charges on the credit card. My question is how far back to we have to go? In this case, we have a roughly $50,000 balance, and there has been a balance on the card for several years. The borrower has charged items and paid principal over time. Should I assume that we need to"prove" the charges on a First In First Out basis, where I would need to obtain the most recent receipts that total at least the current balance, plus any principal payments (documented) until the amount of the receipts equals that sum? Is there any sort of standard method you know of that I can follow to meet SBA's requirements?

A: Your interpretation of what SBA expects to seein order  to document business use of a personal credit card is right on target. So, as you suggested, we believe that you would need proof (credit card statements and invoices/receipts) documenting, in your case, $50,000+/- in clearly business purposes, going back as far as need to get to that amount. In fact, that is exactly the way that NAGGL teaches this concept. We share your concern over possible future second-guessing regarding whether this particular use of proceeds was appropriate.
However, since this is a relatively new concept in the SOP,we want to discuss this with SBA to see if they can offer any insights on how such financing should be documented.  ...

 

Our SBA expert has concurred with the advice that NAGGL provided.

 

And, although it's not mentioned in the original response, don't forget that, since the credit card was issued in the individual's personal name, he/she will need to certify in writing that the loan proceeds are being used only for business-related debt.
 
As to processes/documentation . . . although SBA does not specifically require this, NAGGL suggests that you require your applicant to set up an Excel-type spreadsheet showing, in date order, the date of the charge, the amount, the vendor, and the specific business purpose for each charge being claimed as a business expense. He/she should then attach to that spread sheet, copies of the credit card statements and the individual invoices/receipts, readily able to be cross-referenced to the spread sheet. [You might suggest numbering the lines on the spreadsheet, and numbering the documentation corresponding to/supporting each line.]  He/she must include enough individual charges to total the full amount being paid with the SBA loan ($50,000+/-), plus, a little additional cushion. The SOP says that credit card statements and receipts are only required for charges in excess of $100., but we suggest providing them for all charges just to be (overly) cautious. Our SBA expert did confirm that 'there is no time limit on how far back they will need to go.'  
 
Refinancing credit card debt (especially when the card is held in a personal name) is a potential minefield. But, based on our discussions with SBA, it seems that the agency would find the documentation we are suggesting, together with the borrower certification, to be adequate to 'prove' that your loan is repaying debt that had a business purpose. 

 

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