Best Practices: What SBA Lenders Need to Know About the Return of the Credit Elsewhere Test in the SOP 50 10 8

Under the current SOP 50 10 7.1, lenders could essentially treat the Credit Elsewhere Test as a check-the-box exercise. That will no longer be the case starting June 1, 2025, when the SOP 50 10 8 becomes effective. The new SOP 50 10 8 reverts to prior practices of mandating a narrative within the credit memorandum demonstrating that the applicant is unable to obtain some or all the requested loan amount on reasonable terms from non-Federal, non-State, or non-local government sources, including the Lender without SBA assistance. If the applicant’s cash flow and collateral, including the adequacy of any third-party guaranty, would cause the applicant’s loan to meet commercial credit policy standards, then applicant is not eligible for an SBA Loan.

The credit narrative must explain that the lender has reviewed the availability of credit elsewhere as it relates not only to the applicant, but also to any 20% or more owners, as well as their spouses and minor children. There is an exception that specifically allows owners to have reasonable funds set aside for possible future medical expenses, educational expenses and retirement needs as well as working capital for the small business applicant.

What this means for lenders:

• No more boilerplate statements or check the box outlines in the credit memorandum. Lenders must provide a reasoned, fact-specific justification based on the specific applicant’s financial condition, collateral, terms available, and more.
• Narrative support is required. Simply stating a business “could not qualify for conventional financing” will not suffice. Lenders should consider referencing internal lending guidelines, market standards, and borrower-specific risk factors applicable to the specific deal.
• Applies to all loans. Regardless of size or type, all 7(a) loans must include a Credit Elsewhere analysis.

This change underscores the SBA’s commitment to preserving program integrity and ensuring its limited resources are directed to small businesses that truly need the assistance.

As you prepare for this transition, be sure to update your internal credit policies and train your underwriting staff to incorporate a thoughtful Credit Elsewhere narrative into every loan file. Failure to properly document Credit Elsewhere in accordance with the SOP 50 10 8 could create issues in an OCRM audit as well as be grounds for a full denial of the SBA guaranty.

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