Best Practices: Bridging the Gap with Interim Advances

Since the SBA 7a program is designed to expand access to capital for small businesses who cannot obtain credit elsewhere, lenders must ensure that all diligence items have been cleared before moving forward with closing. As such, it is generally understood that a closing for an SBA 7a loan can take some time due to the regulatory requirements associated with the conditional SBA guaranty. But, what is a lender to do when a borrower presents with a drop-dead closing date that cannot be moved without causing significant consequences for the borrower?

For example, say a small business has been working diligently for weeks with a lender to provide all items required to finance the purchase of real estate and renovations to the building. The borrower has cleared all items needed to close on the real estate but is still working through a few construction requirements when they learn that the seller will not grant an extension on the closing date so the borrower either needs to close or forfeit their deposit and ability to purchase the real estate. What options does the lender have to help the borrower?

In this situation, a lender may want to consider offering a bridge loan (also known as an interim advance), which is a form of short-term financing used by a small business to bridge a gap until permanent financing can be put into place. In this situation, that means the lender extending a loan for the borrower to purchase the real estate, then once all conditions to closing have been satisfied, using the SBA 7a loan to refinance the short-term purchase loan and finance the construction.

Under the SOP 50 10 7.1, such interim advances are authorized. However, lenders must pay careful attention to the timing of SBA approval and disbursements to determine if the 7a loan can be processed PLP or needs to be submitted GP. Specifically, a lender may use PLP authority to refinance interim advances if:

1. The debt is an interim loan that has been made for other than real estate construction purposes and was approved by the Lender within 90 days prior to the issuance of an SBA loan number; or
2. The debt is a construction loan that has not been disbursed at the time the SBA loan number is issued.

Under all other situations, a lender must submit the 7a loan to the SBA for GP approval.

Lenders considering a bridge loan should consider all possible options and the potential risks before moving forward. For example, if the borrower is unlikely to be able to overcome the hurdles preventing closure of the 7a loan within the term of the bridge loan then an interim advance may only do more harm than good.

Since lenders are extending an SBA loan because a borrower does not qualify for traditional lending, most lenders are unwilling to fund any proceeds until all SBA loan requirements have been met. However, there are some situations where the Borrower needs short term financing until the 7a loan can clear to close. In those situations, the lender should carefully assess the facts and be sure to comply with the requirements in the SOP.

For more information on interim advances, please contact the attorneys at Starfield & Smith, P.C. at 215-542-7070 or visit us at www.starfieldsmith.com.