As we mentioned in earlier posts, eligibility is a “black and white” issue: during SBA’s guaranty purchase review, if SBA concludes that a loan or borrower was ineligible at the time of loan approval SBA will deny the guaranty (if the lender had delegated authority under the PLP or other similar programs, or if the lender failed to disclose material information at the time of application). At the most basic level, in order to be eligible for SBA-guaranteed financing, a small business concern must be 1) an operating business, 2) organized for profit, 3) located in the United States (including territories and possessions) 4) meet SBA’s size standards as a “small business” and 5) demonstrate a need for the desired credit. One of the most complicated problems when determining whether a small business concern may be eligible for SBA-guaranteed financing involves SBA’s concept of “affiliation”.
In the SBA context, affiliation can arise through common ownership, contractual relationships (fuel supply agreements, franchise agreements, license agreements, or any agreement which provides for goods or services critical to the borrower’s business), or through the other considerations set forth more particularly at 13 C.F.R. 121.103. Generally, federal law defines affiliation for purposes of SBA lending in the following manner: “Concerns and entities are affiliates of each other 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.” 13 C.F.R. 121.103. Even an individual who is not named as an equity holder, officer, or director, but who has the indirect right or power to control multiple borrower entities, could create affiliation between the entities in question.
Affiliation can potentially make a loan or multiple loans ineligible in two ways: 1) if the borrower and its affiliates exceed the SBA’s applicable size standards or 2) if the SBA’s exposure to the borrower and all of its affiliates exceeds program limits. If a loan is ineligible, the SBA has the absolute right to deny liability.
Determining whether a potential SBA loan may be eligible under program guidelines may be a daunting task. However, when documented properly, the SBA program has countless potential benefits for lenders, small businesses, and communities serviced by lenders and their business clients. For more information, please Prudent Lenders.