May 17, 2018

 Administrator testifies on The State of Small Business in America

 SBA Administrator Linda McMahon testified Tuesday at a Senate Committee on Small Business & Entrepreneurship hearing, The State of Small Business in America: An Update from the U.S. Small Business Administration. If you were unable to tune-in live you can view the archived webcast here >


Administrator's written testimony >


Loans structured with balloon payments & 7(a) debt refi rules

Q: As we know, loans structured with a balloon payment meet eligibility criteria for SBA financing. My staff and I have heard SBA policymakers during meetings & conversations state that a loan with a balloon component may be eligible for debt refinance, but that the existence of a balloon payment alone does not necessarily mean the credit elsewhere provision has been met.  That makes sense if a request is to refinance a loan of $200,000 with a balloon and the borrower has $5 million of liquidity.  But, the examples that SBA discussed involved a balloon payment coming due within a couple of years, which 'should be fine', but if it were longer out, there might be questions on credit elsewhere.  
This vagueness is causing uncertainty and caution when considering a debt refinance situation.  For example, is a loan that has met credit elsewhere in every other way, but has a balloon due in 5 years acceptable?  What about 10-year balloon?  I am sharing a question from one of our bankers and the response from SBA: Our banker asked if a real estate loan that has a balloon due in 10 years is eligible for refinancing. The response we received was: “Yes, you are correct. Any note with a balloon payment is considered unreasonable. The 10% savings requirement does not apply.”  There was no mention of credit elsewhere, no asking for more detail regarding the "story", or what hardship would occur if the customer could not refinance now. Can NAGGL provide any insights or experiences on this topic? 


A: As you clearly know, the SOP list of loans that may be refinanced via 7(a) includes loans structured with demand notes or balloon payments.  [SOP 50 10 5(J), p. 125.]  However, inclusion on this list simply means that the nature of the loan makes it potentially eligible for refinancing – it does not mean that all issues of eligibility, including the credit elsewhere test, have been addressed.   

So, as to your colleague’s original question regarding whether a note which has a balloon payment is considered to be on unreasonable terms, we concur with the response that you received from SBA: that is, that the current loan with its balloon feature would not be considered to be on reasonable terms, and would not be subject to the 10% cash flow improvement test. Remember that until a few years ago, SBA did require that the cash flow improvement test be applied in a balloon situation.  So, since during its life, the payments being required on a balloon note usually are lower than on a fully amortizing note, the result was that a balloon note generally would only qualify for refinancing in the year in which the balloon was coming dueBUT, an SOP change clarified this point, and, balloon notes are no longer subject to the cash flow improvement test.  Therefore your situation appears to meet the requirements related to refinancing eligibility.

However, as previously noted, you still need to document the factors that make it impossible for your bank to provide the requested refinancing without SBA’s guaranty.  To satisfy this threshold eligibility criterion, you need to be able to certify that your applicant “does not have the ability to obtain some or all of the requested loan funds on reasonable terms from non-Federal sources, including from the Lender, without SBA assistance”.  Part of the consideration involved is whether your applicant’s “cash flow and collateral, including the adequacy of any third party guaranty” would allow the proposed new loan to meet your conventional credit standards.  And, under the new requirements, you also need to address the issue of whether the personal liquidity of all 20% or more owners (including spouses and minor children), and of the applicant itself, would provide a source for some or all of the requested loan amount.  [SBA’s complete discussion of credit elsewhere is found in SOP 50 10 5(J), pp. 97-98.]

In summary, we think that the clearest way to think of your situation is as a two-part test.  First, is the existing loan potentially eligible for refinancing under 7(a)?  Based on the limited information available to us, it clearly appears that it is.  Then, second, the question becomes whether having the SBA guaranty is essential to your institution being able to provide the requested refinancing.  The factors to be considered in making that decision are those that are contained in the cited SOP, including the traditional issues of whether the industry is one to which your bank lends, whether the collateral is adequate under bank policy, whether you could provide the term that is necessary for the borrower’s cash flow to be adequate to repay the loan, etc. 

Franchise language required to be inserted into Loan Authorization

Just a reminder:  There is language provided in SOP 50 10 5(J) on page 212 that lenders must manually insert to the Authorization when originating a franchise loan:



The following language must be manually inserted into the Authorization Boilerplate or any streamlined or abbreviated Authorization used by a delegated Lender: 

“Lender must obtain the executed Franchise Agreement, the SBA Addendum to Franchise Agreement (SBA Form 2462), or the SBA Negotiated Addendum (if applicable), and all other documents the franchisor requires the franchisee to sign prior to any disbursement of Loan proceeds and retain in the loan file. Failure to obtain the executed documents may result in a denial of liability on the guaranty.” 

This language will be manually inserted into the Authorization Boilerplate by the LGPC for non-delegated loans. For delegated loans, this language must be manually inserted into the Authorization Boilerplate by the Lender. The language can be manually inserted into the “prior to closing” section of the 7(a) or 504 Authorization Boilerplate by clicking “Edit” and adding the language above.

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