July 27, 2016

Best Practices: Trusts in SBA Lending

by Kimberly A. Rayer

When a SBA lender comes across a small business applicant whose ownership interests or assets are owned by a Trust, the first question often asked is whether the Trust or Trustee need to be a borrower or a guarantor of the loan. The simple answer is that if the Trust benefits directly from the loan, then it should be a borrower. However, lenders should keep in mind that the answer is often impacted by the terms of the Trust agreement, other Federal and State Laws governing Trusts and the requirements in the SOP 50 10 5 (H) (“SOP”).

A Trust does not need to meet the criteria as “small” under SBA regulations in order to qualify for SBA financing. Instead, the SOP states that in order to determine whether a Trust is eligible for SBA financing, a Lender must determine the eligibility status of the Trustor (the party that created the Trust). All donors to the Trust are deemed to be Trustors for the purpose of determining the eligibility of the Trust. However, beneficiaries of the Trust are not considered for eligibility purposes, nor are they required to be guarantors of an SBA loan.

The SOP makes an exception for 401(k) Plans and Employee Stock Ownership Plans (ESOP) to the rule that 20% or more owners of a Small Business Applicant must guaranty the SBA Loan. However, the exception does not exist for Small Business Applicants that are Eligible Passive Companies (EPC). If the 401(k) Plan or ESOP owns the EPC, the EPC is ineligible for SBA financing.

If the Trust owns 20% or more of the small business applicant, the trust must guarantee the loan and the Trustee must sign the guarantee on behalf of the Trust. However, Lenders should be aware that under certain state laws and pursuant to the terms of some Trust agreements, the assets of the Trust may be held in title by the Trustee, individually, and not in the name of the Trust. If so, it is important that the Trustee grant the security interest to Lender in the assets held in Trust. Further, if the Trustee’s principal place of residence is in a state that is different than the state where the Trust was formed, then the Lender should file a financing statement against Trustee in its state of residence, as well as, against the Trustee in its state of formation.

Finally, when a Trust is either a co-borrower or guarantor of an SBA loan, the SOP requires that the Lender obtain the following certification from the Trustee:

  1. The Trustee(s) has/have authority to act on behalf of the Trust;
  2. The Trust has authority to borrow funds, pledge trust assets, and lease the property to the Operating Company;
  3. The Trustee has provided accurate, pertinent language from the trust agreement confirming the above; and
  4. The Trustee has provided and will continue to provide SBA with a true and complete list of all trustors and donors.

By keeping these guidelines in mind, Lenders can ensure that their SBA loans involving Trusts are properly secured and are compliant with the applicable SBA regulations. For more information regarding SBA loans involving Trusts, please contact Kim at or at 267-470-1208.