Best Practices: Credit Not Available Elsewhere

One of SBA’s core requirements for all 7(a) and 504 loans is to verify and document the unavailability of credit on reasonable terms from non-federal, non-state, and non-local government sources, thereby necessitating the need for SBA-guaranteed financing.  See 15 USC 636(a)(1)(A) and 13 CFR § 120.101.  SBA’s SOP 50 10 7 (“SOP”), effective August 1, 2023, incorporates the longstanding requirements concerning SBA’s “credit elsewhere test”, with some key documentation changes from past practices.

First let’s review the factors SBA lenders must consider in performing a credit elsewhere analysis as set forth in 13 CFR § 120.101, noting that lenders are not currently required to consider the personal resources of owners of the applicant:

• The business industry of the applicant and whether the applicant has been in operation two years or less;
• The adequacy of collateral available to secure the loan.
• The loan term necessary to reasonably assure payment of the loan from actual or projected business cash flow;
• Any other factor relating to the particular loan application that cannot be overcome except through obtaining a Federal loan guarantee under prudent lending standards.

The SOP 50 10 7 indicates lenders may document the justification for credit not available elsewhere via an automated process (i.e. check the box), where the lender selects one of the below justifications, among others; and the SOP further states that “there is no requirement for written justification in the lender’s credit memorandum beyond lender certification to one or more of the eligibility justifications because the enumerated regulatory justifications are easily validated upon request by the SBA.”

SBA sets forth the following acceptable justifications in documenting lender’s certification as to credit not available elsewhere:

• The business needs a longer maturity than lender’s policy permits to reasonably assure repayment from the expected cash flow of the business.
• The requested loan exceeds the lender’s limit regarding the amount it can lend to one customer.
• The collateral does not meet lender’s policy requirements.
• The lender’s policy normally does not allow loans to new businesses (i.e. a business that has been in operation for a period of not more than 2 years) or businesses in the applicant’s industry.
• Any other factors relating to the particular credit that in the lender’s opinion cannot be overcome except for the government guaranty (i.e. business and personal credit history, management experience, leverage ratio, global cashflow, and loan size relative to age of business).
• Lender may cite the applicant’s inability to meet the lender’s conventional credit score policy as the sole reason that credit is not available elsewhere.

Historically, SBA has required lenders to thoroughly and precisely document their justifications for certifying that credit is not available elsewhere with details specific to the subject loan applicant.  The language in SOP 50 10 7 represents a significant shift in SBA’s documentation requirements concerning this key eligibility condition.  Since inadequate documentation concerning justification of credit not available elsewhere has been a key finding in loan audits and guaranty purchase requests, lenders should consider continuing to substantiate their loan files, whether in the credit memo or separately in the loan file, with the justifications supporting their decisions.  This is especially true because in the absence of documentary backup for the no credit elsewhere determination, SBA may not be able to “easily validate” this determination in the context of a guaranty purchase.

For SBA compliance matters, contact the attorneys at Starfield & Smith at 215.542.7070 or info@starfieldsmith.com.