The SBA program is deeply rooted in the idea in providing support only to “applicants for whom the desired credit is not otherwise available on reasonable terms from non-Federal sources.” 13 CFR §120.101. The credit elsewhere test has changed over time and lenders often have questions regarding how to properly document their credit elsewhere analyses.
Under SOP 50 10 5 (K), “The Lender must certify that the Applicant does not have the ability to obtain some or all of the requested loan funds on reasonable terms from non-Federal, non-State, or non-local government sources, including from the Lender, without SBA assistance.” SOP 50 10 5 (K), pg. 102. In order to document this, Lenders must consider whether (i) the subject credit could be approved conventionally or (ii) the business or owners of 20% or more have sufficient liquidity to finance some or all of the loan.
When assessing whether the subject credit could be approved conventionally, Lenders must include an analysis in their credit memorandum of whether the terms of the loan meets the conventional credit standard of the lender itself. In doing so, it is recommended that the lender cite specifically to the conventional credit policy and how it differs. For example, rather than stating “The business needs a longer maturity than the Lender’s policy permits,” Lender should elaborate by adding, “Lender’s conventional policy only permits a term of 5 years for this type of financing. Borrower’s cash flow does not support a 5 year amortization.” While the narrative analysis does not necessarily need to be long, it does need to be fact specific. Lenders should avoid check the box forms or boilerplate language as each loan is required to be assessed on a case-by-case basis.
In addition to conventional financing, lenders must consider the “liquidity of owners of 20% or more of the equity of the Applicant, their spouses and minor children, and the Applicant itself.” Detail on available liquid assets (i.e. cash and cash equivalents) from the above parties should be described in a narrative in the credit memorandum. Lenders are not required to consider real estate assets or retirement accounts as these are not considered to be liquid.
Lenders should also be aware that certain factors are explicitly not permitted as the basis for establishing credit not available elsewhere. Lenders cannot solely rely upon either:
- The fact that the liquidity of the Lender depends upon the guaranteed portion of the loan being sold on the secondary market; or
- The guaranty will allow the Lender to exceed its legal lending limit. SOP 50 10 5 (K), pg. 103.
Further, the lender may not rely at all upon:
- The maintenance or improvement of the Lender’s rating or performance evaluation under the Community Reinvestment Act (CRA) or its implementing regulations; or
- The improvement of the Lender’s collateral lien position. SOP 50 10 5 (K), pg. 103.
The credit not available elsewhere test is a critical piece of a lender’s underwriting. In the context of a loan made under delegated authority, it is an eligibility issue. Failure to properly analyze and document the test could impact the SBA guaranty.
For assistance with SBA lending matters, contact the attorneys at Starfield & Smith, PC at 215.542.7070 or email us at email@example.com.
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