Over the years SBA has worked hard to streamline its lending programs making them more user friendly for business owners and lenders. The loan application process has also been re-tooled making it possible for lenders to submit many loans electronically and receive an immediate response from SBA. Below is a list of eight items you should review and begin early on in the application process to assist in determining loan eligibility and prevent processing delays or hiccups:
- Credit Elsewhere Test
- Eligibility Checklist
- Character Issues – SBA Form 912
- Citizenship – Alien Verification Process
- Tax Return Verification – IRS Form 4506T
- Franchise/Dealer Agreements
- Environmental Issues
1. Lender must first determine that it cannot consider the loan request without SBA’s guaranty. The small business applicant’s need for the loan is determined by applying the “Credit Elsewhere Test.” This analysis determines whether the borrower has the ability to obtain some or all of the requested loan funds from alternative sources without causing undue hardship. (13 CFR 120.101)
The lender must determine that the applicant is unable to obtain the loan on reasonable terms without a Federal government guaranty, and that some or all of the loan is not available from the resources of the applicant business or the personal resources of the principals of the applicant business. As part of the credit elsewhere test, SBA requires the personal resources of any owner of 20 percent or more of the small business applicant be reviewed. (13 CFR 120.102) The rule also applies to each person when the combined ownership of the spouses and dependent children is 20 percent or more. If some or all of the loan applied for is otherwise available on reasonable terms from any of these sources, the loan application must be reduced or declined.
The lender must substantiate the factors that prevent the financing from being accomplished without SBA support and retain the explanation in the applicant’s file. The file must contain documentation that specifically identifies the factors in the present financing that meet the credit elsewhere test. Acceptable factors that demonstrate an identifiable weakness in the credit or exceed policy limits of the lender include, among others:
a) The business needs a longer maturity than the lender’s policy permits (for example, the business needs a loan that is not on a demand basis);
b) The requested loan exceeds either the lender’s legal lending limit or policy limit regarding the amount that it can lend to one customer;
c) The lender’s liquidity depends upon selling the guaranteed portion of the loan on the secondary market;
d) The collateral does not meet the lender’s policy requirements;
e) The lender’s policy normally does not allow loans to new businesses or businesses in the applicant’s industry; and/or
f) Any other factors relating to the credit that, in the lender’s opinion, cannot be overcome except for the guaranty. These other factors must be specifically documented in the loan file.
Unacceptable factors include:
a) To address the lender’s Community Reinvestment Act (CRA) compliance; or
b) To refinance debt already on reasonable terms.
2. The Lender reviews the applicant's proposal to determine if it meets SBA's eligibility requirements. Eligibility Checklists for each program have been provided by SBA and are available on SBA's website at www.sba.gov/aboutsba/sbaprograms/elending/index.html
3. Character Issues - SBA Form 912, Statement of Personal History is required for all proprietors, partners, officers, directors, and holders of 20 percent or more of the ownership, if a corporation or limited liability company, and anyone in a management capacity who has authority to make decisions for the company.
4. Citizenship - The lender must determine citizenship and if applicable submit USCIS Form G-845, Document Verification Request (Required for all those who indicate they are not U.S. citizens)
(Steps 3 & 4 have questions incorporated into the application forms for Express/PTX/PLP/RLA/SLA – which may then require Form 912 and G-845 based on the applicant’s response)
5. Tax Return Verification - IRS Form 4506-T. Lenders must verify the accuracy of the applicant's financial data against income tax data by submitting IRS Form 4506-T, Request for Transcript to the Internal Revenue Service (IRS). This is required for all existing businesses as well as changes of ownership (seller's return). If sole proprietorship, lender must verify Schedule C.
6. Franchises – Lender must determine if the applicant business is a franchise.
Lenders should go to http://www.sba.gov/content/franchise-findings to check the SBA Franchise Findings List for information with respect to a specific Franchise/License/Dealer/Jobber or similar agreement to review specific findings and see if there have been any findings for a particular Franchise/License/Dealer/Jobber or similar agreement, which if still in the Agreement, would make the Agreement ineligible. Lenders may also contact SBA at firstname.lastname@example.org to request statistical information on SBA lending to a specific franchise operation. This mailbox is not designed to evaluate franchise material, so lenders should not send franchise documents to this mailbox for review. In addition, lenders may contact SBA counsel in the District Office or the SBA Franchise Counsel for specific questions regarding eligibility determinations.
Registry of approved franchise/license/dealer/jobber or similar agreements
To facilitate the review of these agreements, the Franchise Registry (“Registry”) lists franchise agreements that have been approved by SBA. Lender must ensure that the documents with the loan application are the same as the documents listed on the Registry.
Lenders must follow the procedures set forth below to determine franchise program eligibility for a loan application.
(1) Check www.franchiseregistry.com to determine if the agreement is listed.
(a) Process to determine if listed on Registry
Lender must log into the Lender’s section from the Home Page of the Franchise Registry using their password. Upon logging into the Lender’s section, lender should type the name of the franchise system in the Search Box to determine if a specific franchise system has been listed on the Registry. If the franchise system is not listed, lender should follow the procedure under (b) below. If the franchise system is listed, lender should click on the plus (+) box to determine if the specific year (effective date) of the Agreement has been listed. Agreements have been organized into loan folders. If the specific year of the Agreement is not listed as a loan folder, lender should follow the procedure under (b) below. (Lenders are no longer able to use the generic Certification of No Material Change Form.) If the specific year of the Agreement is listed as a loan folder, lender should open the loan folder. Lender should then click on “View Agreement Detail” to review the specific eligibility of the specific Agreement. Lender should review the Agreement Application Summary page for the following information:
(i) Determination Date (Approval) of the Agreement;
(ii) Addendum required; and
(iii) Specific Eligibility Notes (formally Footnotes).
Lender should return to the Loan Folder to print the Certification of Franchise Documents.
In order for a franchise agreement to be eligible under the Franchise Registry the lender’s file must include the following:
(i) Executed franchise/license/dealer/jobber Agreement and any approved attachments and exhibits;
(ii) Executed Addendum (if required);
(iii) Executed Certification of Franchise Documents; and
(iv) Compliance with any required eligibility notes.
(b) Not Listed on Registry
(i) If the Agreement is not listed on the Registry, a review must be made of the Agreement and all related documents.
(ii) Lenders must consult the franchise findings list at http://www.sba.gov/content/franchise-findings to see if there have been any findings for a particular Franchise/License/Dealer/Jobber or similar agreement, which if still in the Agreement, would make the Agreement ineligible. The information provided by the SBA Franchise Findings List should be used by Lenders to ensure they are making informed eligibility determinations. Lenders should consult the findings list under the “fix available” category to see if there is a fix to remedy the specific issues noted on the findings list.
(iii) If an Agreement has no negotiated fix available and the noted findings remain in the Franchise/License/Dealer/Jobber or similar agreement, then the Agreement should be determined to be ineligible. Lender may contact the SBA Franchise Counsel for additional guidance.
7. Litigation. Lender must determine if there is any indication in the loan application package of any pending litigation or other legal action against the applicant and/or principals that could impact repayment ability and address the issues with SBA counsel as early in the process as possible.
8. Environmental Issues. SBA requires an Environmental Investigation of all commercial Property upon which a security interest such as a mortgage, deed of trust, or leasehold deed of trust is offered as security for a loan or debenture. The type and depth of an Environmental Investigation to be performed varies with the risks of Contamination.