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Ethan W. Smith, Esquire

On May 25, 2012, SBA issued SOP 50 10 5(E), which will become effective on June 1, 2012, and which provides several significant changes to the 7a loan program, most notably to the debt refinancing requirements for the 7a loan program. The changes are in response to requests from lenders that have found the prior requirements to present an unreasonable impediment to extending loans to otherwise eligible small businesses.

The current version of the SBA's Standard Operating Procedure, SOP 50 10 5(D), which became effective on October 1, 2011, restricted a Lender's ability to refinance debt in the personal names of the owners of the business. The SBA's approach attempted to draw a "bright line" rule that would minimize the chances that SBA Lenders would use loan proceeds to refinance debt that was not business related. However, compliance with this restriction caused a great deal of difficulty for Lenders who were attempting to refinance business debt that, for a variety of legitimate reasons, was made to the owner of the business rather than the business itself. Confusion also surrounded the ability to refinance the debt of sole proprietors and individual EPC's with an SBA loan. Additionally, as it is a common practice for equipment lenders that lend to professional practices to lend directly to the owner of the business, rather than the business entity itself, this restriction has become an increasingly difficult issue for lenders to comply with when refinancing the business related debt of many of their customers.

Fortunately, the new SOP has clarified the SBA's requirements for this type of refinance. SOP 50 10 5(E) permits the refinance of debt in the personal name of the owner of the business, including HELOC debt, provided that the borrower certifies that the debt being refinanced was used exclusively for business purposes and provides documentation to support this certification. Such documentation could include a copy of the note, settlement statement, and/or invoices showing the use of proceeds for the debt being refinanced, as well as tax records and business financial statements demonstrating that the debt has been characterized and reported as business debt, and not personal debt. As always, there is no definitive list of the documentation to be reviewed and/or provided, but the more documentation that proves the business related nature of the debt, the less likely the refinance decision will be questioned by the SBA.

The revised rule regarding refinancing does not change the requirements for the refinancing of credit card debt that is in the personal name of the owner of the business. In such case the Lender must obtain a certification that the debt being refinanced was exclusively business related, must review the credit card statements to determine which charges are business related, and must provide copies of all statements evidencing the debt to be paid, plus receipts for all amounts for expenses in excess of $100.00. This is a very difficult standard to meet from a documentation perspective and should not be taken lightly.

By following these new guidelines, Lenders should be able to assist more businesses refinance their business related debt, regardless of the name in which the debt was incurred. However, Lenders should be mindful of the documentation requirements set forth herein to avoid potential repairs or denials of their SBA loan guaranty.

For more information on the changes to SBA rules set forth in SOP 50 10 5(E) and other SBA eligibility issues, please contact Ethan at ESmith@StarfieldSmith.com or (215) 542-7070.