Best Practices: International Business Operations Under SOP 50 10 5(K)

SOP 50 10 5(K) addresses eligibility issues surrounding Small Business Applicants that are engaged in international business operations who apply for government guaranteed loans under the 7(a) loan program and the International Trade Loan program.  If a Small Business Applicant is engaged in international business operations, the Applicant is not permitted to use 7(a) loan proceeds for its business operations outside of the United States.  The Applicant is only permitted to use 7(a) loan proceeds to benefit its domestic operations.  See SOP 50 10 5(K) at page 92.  If a Lender knows that the Applicant is conducting international operations, then the Lender may want to have the Applicant execute an affidavit at closing stating that it shall only use the 7(a) loan proceeds for its domestic operations.

If the Applicant intends to use loan proceeds to support its export business or to compete against imports, then it may qualify for an International Trade Loan.  The Applicant must meet specific requirements in order to qualify for an International Trade Loan.  The Applicant must show, and the Lender must exhibit in its credit memo, that the International Trade Loan will allow the Applicant to improve its competitive position in the market.  See SOP 50 10 5(K) at page 127.  In addition, the Applicant must show that either the loan proceeds will help to expand existing export markets or develop new export markets, or, in the alternative, that the Applicant is adversely affected by import competition.  See SOP 50 10 5(K) at page 126-127.

If the Applicant seeks to expand existing export markets or develop new export markets, then it must provide an export business plan that sets forth the amount of expected export sales and that provides a projection and a narrative supporting its claim of increased export sales.  See SOP 50 10 5(K) at page 126-127.  The Applicant is not permitted to export directly or indirectly to any country that is listed as a prohibited country on the Ex-Im Bank Country Limitation Schedule.  In determining eligibility for an International Trade Loan, the Applicant is permitted to include indirect exports whereby the Applicant engages in business with a domestic customer who, in turn, exports the Applicant’s items  or services to a foreign country that is not listed as a prohibited country on the Ex-Im Bank Country Limitation Schedule.

Alternatively, the Applicant can show that it is adversely affected by import competition in order to quality for an International Trade Loan.  See SOP 50 10 5(K) at page 127.  The Applicant must show that it has sustained injury due to increased competition with foreign firms in its market.  The Applicant must provide a narrative analysis along with financial statements that prove that competing, imported products or services “have contributed significantly to a decline in competitive position.”  See SOP 50 10 5(K) at page 127.  The Applicant also has the option to provide “a finding of injury by the International Trade Commission or the Secretary of Commerce pursuant to Chapter 3 of Title II of the Trade Act of 1974 (19 U.S.C. 2341 et seq.)” to qualify for an International Trade Loan.  See SOP 50 10 5(K) at page 127.

Should an Applicant qualify for an International Trade Loan, the Applicant is only permitted to use loan proceeds for very specific purposes.  The Applicant can use International Trade Loan proceeds to “[a]cquire, construct, renovate, modernize, improve or expand facilities and equipment to be used in the United States to produce goods or services involved in international trade and to develop and penetrate foreign markets.”  See SOP 50 10 5(K) at page 144.  The Applicant can also use International Trade Loan proceeds for working capital.  Lastly, the Applicant can use International Trade Loan proceeds for refinancing debt that is not on reasonable terms and conditions, which includes debt that qualifies for refinance under the 7(a) loan program.

For assistance with SBA lending matters, contact the attorneys at Starfield & Smith, PC at 215.542.7070 or email us at info@starfieldsmith.com.