When considering whether to refinance a small business applicant's existing debt, lenders must do their research. The steps for determining whether existing debt is eligible for refinancing with SBA guaranteed loan proceeds are set forth in SOP 50 10 5 (D) Subpart B, Chapter 2, Section IV, E, page 132.   The debt refinancing provisions of the SOP have not significantly changed under the new SOP 50 10 5 (D), which became effective on October 1, 2011. However, revisions to other provisions of the SOP, in particular, with respect to change of ownership, may impact the scope and depth of a lender's analysis with respect to debt refinancing.

The lender's first step in a debt refinancing analysis is to determine whether the original loan purpose would have been eligible for SBA financing at the time the loan was made. Since change of ownership financing is an eligible use of SBA loan proceeds, often lenders end their investigation once it is determined that the original loan was made to finance a business acquisition.   In some cases the debt is simply classified as "business debt". However, in light of the recent clarifications made in the SOP 50 10 (5) (D) with respect to the eligible structure for financing a change of ownership with SBA guaranteed loan proceeds, it is not advisable to only rely on the small business applicant's debt schedule or a copy of the promissory note subject to refinancing. Lenders should inquire into the original purpose of the loan and, if it is related to a business acquisition, review the purchase documents to determine its eligibility under the SOP.

The change of ownership provisions found in SOP 50 10 5 (D), Subpart B, Chapter 2, Section IV, H, page 138, provide that an SBA loan can be used to finance a change of ownership through an asset purchase, transfer of a partnership interest or a redemption of stock. A partner, shareholder or an unrelated third party may not use SBA guaranteed loan proceed to purchase an existing owner's interest in the business. A new provision in the debt refinancing section of the SOP 50 10 (5) (D) Subpart B, Chapter 2, Section IV, E. 2., page 132, states that SBA guaranteed loan proceeds may not be used to refinance debt in the name of the owners of the small business applicant, with a limited exception for credit card debt. The prohibition on financing stock purchases and the individual debt of owners carries through to refinancing existing debt. Under the new SOP, debt in the small business applicant's owners' name, whether incurred in connection with a stock purchase transaction or a partial change of ownership (i.e. a sale of a portion of membership interest between members), is not eligible for refinancing using SBA guaranteed loan proceeds.

At this time, its uncertain whether the prohibition on refinancing stock purchases or partial change of ownership in the name of individuals applies to debt originally incurred prior to October 1, 2011 (the effective date for the new SOP). The refinancing provisions of the SOP state that the loan purpose cannot have been ineligible for SBA financing at the time it was originally made. Changes made in the prior SOP 50 10 5 (C) (effective October 1, 2010) led some lenders to presume that stock purchases may not be eligible for financing, but this policy was not clearly stated by the SBA until the SOP 50 10 5 (D). However, SBA Policy Notice 5000-1217 dated September 16, 2011 states that the SBA deems the revisions to the SOP 50 10 5(D) to be simplifications or clarifications of existing policy. So, lenders who choose to refinance stock purchase debt or individual owners debt related to a change of ownership run the risk of a possible repair or a denial of the SBA guaranty on the basis of an ineligible loan purpose. Regardless of the actual risk of such action by the SBA related to debt incurred prior to the effective date of the new SOP and whether there is a defense to any repair or denial, the best course of action for lenders is to thoroughly document the original loan purpose and business acquisition structure in connection with change of ownership debt refinancing.

If you have any questions about change of ownership debt refinancing, please contact Kim at krayer@starfieldsmith.com  or 215-542-7070.

                                                                  Back to top