WHEN ARE AFFILIATE GUARANTEES REQUIRED?

Lenders often wonder when they are required to obtain guarantees of entities that are affiliated with their borrowers. Although the SOP 50-10 requires that a lender consider affiliates when conducting its analysis of size standards and determining maximum loan size and guaranty amounts, the SOP does not specifically address the question of whether a lender must require that an affiliate of the borrower guarantee a loan. Nevertheless, because the SOP requires that lenders take a security interest in all available collateral (for loans that are not otherwise fully secured), there may be instances when lenders will need to consider requiring guarantees of affiliates of the borrower.

13 CFR §121.103 sets forth the standards for determining affiliation. Specifically, the SBA considers businesses to be affiliated "when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists." 13 CFR §121.103(a). In determining whether affiliation exists the SBA looks at the totality of the circumstances, even if no single factor rises to the level of affiliation. In performing an affiliation analysis, the SBA requires that lenders consider a variety of factors, such as:

Common ownership - if an individual or entity owns 50% or more of 2 or more entities, then those entities are affiliates. Additionally, even if the ownership interest does not exceed 50%, but a common owner owns a large ownership percentage compared to other ownership blocks, affiliation may exist. For SBA, common ownership includes stock options and convertible securities.
Common management - if the management of one concern controls the management of another concern, affiliation may exist. Management may include one or more officers, directors, managing members, or partners of an entity.
Previous relationships with or ties to another concern - if individuals or firms have substantially identical business or economic interests (family members, common investments, or economic dependence through contractual or other relationships) they may be treated as one party with such interests aggregated.
Control may be affirmative or negative and direct or indirect. Negative control includes, but is not limited to, instances where a minority owner has the ability to block action by the majority owners. Indirect control includes control that is exercised indirectly through a third party.

If a loan is not otherwise fully secured, lenders should consider taking the guarantees of affiliates of the borrower. If such guarantees cannot be obtained, the lender should fully explain the circumstances in its credit file, and should provide sufficient justification, from a credit standpoint, for making the loan without the guarantees. Taking these steps should help lenders

preserve the loan guarantee in the event that the loan defaults and the lender requests SBA's purchase.

For more information on affiliation and other eligibility issues, contact Ethan Smith at 215-542-7070 or esmith@starfieldsmith.com.

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