SBA Issues New Guidance on New SOP 50 10 5 (J)
The SBA issued SBA Policy Notice 5000-17057 on April 3, 2018 in response to feedback from the lending industry on the most recent version of SOP 50 10 5 (J), which became effective January 1, 2018. This notice was intended to provide new guidance on how to apply the revisions to the SOP.
- In demonstrating credit not available elsewhere, the SBA increased the threshold for looking at personal liquidity considerations for owners from 10% to 20% (which includes reviewing the liquidity of the owner’s spouse and minor children). Lenders will need to discuss the liquidity of 20% or more owners in a business when determining whether credit is not available elsewhere.
- For partner buyouts, lenders must obtain a certification from the borrower that: (i) he/she has been actively participating in the business for at least 24 months (a credit memo must confirm that the lender has obtained this certification and keeps a copy in the loan file); and (ii) the business balance sheets for the most recent completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership. If the borrower cannot satisfy both of these items, the borrower must contribute cash of at least 10% of the purchase price. This requirement also applies to small loans when financing a partner buyout.
- For working capital CAPLines, monitoring is required monthly, quarterly, and annually. There is no need to monitor semi-annually (correcting an error in the most recent SOP).
- As lenders are prohibited from providing financial assistance to any business engaged in any activity that is illegal under federal, state, or local law, the SBA issued additional guidance on marijuana-related business, which still violate federal law (if not state and local law). The notice provides guidance to lenders as to what constitutes marijuana related businesses, which include:
- Direct business: Grow, sell, process, distribute, or sell marijuana or marijuana products, regardless of the amount of such activity;
- Indirect business: A business that derives revenue from sales to direct marijuana businesses or products or services that could reasonably be determined to support the use, growth, enhancement, or development of marijuana, such as selling grow lights or hydroponic equipment to one or more direct marijuana business, or selling or advertising smoking devices or other products intended or designed for marijuana use; and
- Hemp-related businesses: Businesses that grow, produce, distribute, or sell products purportedly made from hemp, unless the business can demonstrate that the activities and products are legal under federal and state law, such as paper, clothing, or rope production. Lenders are also reminded that a borrower cannot lease any space to a marijuana-related business and if it is determined that such leasing activity is occurring, the SBA District Counsel should be consulted to determine what action should be taken.
Lenders should pay close attention to these new guidelines and adhere to the documentation requirements noted.