13 C.F.R. Subpart A—Policies Applying to All Business Loans
Title 13 - Business Credit and Assistance
To be eligible for an SBA business loan, a small business applicant must: (a) Be an operating business (except for loans to Eligible Passive Companies); (b) Be organized for profit; (c) Be located in the United States; (d) Be small under the size requirements of part 121 of this chapter (including affiliates). See subpart H of this part for the size standards of part 121 of this chapter which apply only to 504 loans; and (e) Be able to demonstrate a need for the desired credit. SBA provides business loan assistance only to applicants for whom the desired credit is not otherwise available on reasonable terms from non-Federal sources. SBA requires the Lender or CDC to certify or otherwise show that the desired credit is unavailable to the applicant on reasonable terms and conditions from non-Federal sources without SBA assistance, taking into consideration the prevailing rates and terms in the community in or near where the applicant conducts business, for similar purposes and periods of time. Submission of an application to SBA by a Lender or CDC constitutes certification by the Lender or CDC that it has examined the availability of credit to the applicant, has based its certification upon that examination, and has substantiation in its file to support the certification. (a) An applicant for a business loan must show that the desired funds are not available from the personal resources of any owner of 20 percent or more of the equity of the applicant. SBA will require the use of personal resources from any such owner as an injection to reduce the SBA funded portion of the total financing package (i.e., any SBA loans and any other financing, including loans from any other source) when that owner's liquid assets exceed the amounts specified in paragraphs (a) (1) through (3) of this section. When the total financing package: (1) Is $250,000 or less, each 20 percent owner of the applicant must inject any personal liquid assets which are in excess of two times the total financing package or $100,000, whichever is greater; (2) Is between $250,001 and $500,000, each 20 percent owner of the applicant must inject any personal liquid assets which are in excess of one and one-half times the total financing package or $500,000, whichever is greater; (3) Exceeds $500,000, each 20 percent owner of the applicant must inject any personal liquid assets which are in excess of one times the total financing package or $750,000, whichever is greater. (b) Any liquid assets in excess of the applicable amount set forth in paragraph (a) of this section must be used to reduce the SBA portion of the total financing package. These funds must be injected prior to the disbursement of the proceeds of any SBA financing. (c) For purposes of this section, liquid assets means cash or cash equivalent, including savings accounts, CDs, stocks, bonds, or other similar assets. Equity in real estate holdings and other fixed assets are not to be considered liquid assets. Federal financial assistance to agricultural enterprises is generally made by the United States Department of Agriculture (USDA), but may be made by SBA under the terms of a Memorandum of Understanding between SBA and USDA. Farm-related businesses which are not agricultural enterprises are eligible businesses under SBA's business loan programs. SBA may make or guarantee loans to a business financed by an SBIC if SBA's collateral position will be superior to that of the SBIC. SBA may also make or guarantee a loan to an otherwise eligible small business which temporarily is owned or controlled by an SBIC under the regulations in part 107 of this chapter. SBA neither guarantees SBIC loans nor makes loans jointly with SBICs. SBA will give special consideration to a small business owned by a veteran or, if the veteran chooses not to apply, to a business owned or controlled by one of the veteran's dependents. If the veteran is deceased or permanently disabled, SBA will give special consideration to one survivor or dependent. SBA will process the application of a business owned or controlled by a veteran or dependent promptly, resolve close questions in the applicant's favor, and pay particular attention to maximum loan maturity. For SBA loans, a veteran is a person honorably discharged from active military service. Ineligible Businesses and Eligible Passive Companies The following types of businesses are ineligible: (a) Non-profit businesses (for-profit subsidiaries are eligible); (b) Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances); (c) Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under §120.111); (d) Life insurance companies; (e) Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify); (f) Pyramid sale distribution plans; (g) Businesses deriving more than one-third of gross annual revenue from legal gambling activities; (h) Businesses engaged in any illegal activity; (i) Private clubs and businesses which limit the number of memberships for reasons other than capacity; (j) Government-owned entities (except for businesses owned or controlled by a Native American tribe); (k) Businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting; (l) Consumer and marketing cooperatives (producer cooperatives are eligible); (m) Loan packagers earning more than one third of their gross annual revenue from packaging SBA loans; (n) Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude; (o) Businesses in which the Lender or CDC, or any of its Associates owns an equity interest; (p) Businesses which: (1) Present live performances of a prurient sexual nature; or (2) Derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature; (q) Unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or Departments sustaining a loss in any of its programs, and businesses owned or controlled by an applicant or any of its Associates which previously owned, operated, or controlled a business which defaulted on a Federal loan (or guaranteed a loan which was defaulted) and caused the Federal government or any of its agencies or Departments to sustain a loss in any of its programs. For purposes of this section, a compromise agreement shall also be considered a loss; (r) Businesses primarily engaged in political or lobbying activities; and (s) Speculative businesses (such as oil wildcatting). An Eligible Passive Company must use loan proceeds to acquire or lease, and/or improve or renovate, real or personal property (including eligible refinancing), that it leases to one or more Operating Companies for conducting the Operating Company's business (references to Operating Company in paragraphs (a) and (b) of this section mean each Operating Company). Any ownership structure or legal form may qualify as an Eligible Passive Company. (a) Conditions that apply to all legal forms: (1) The Operating Company must be an eligible small business, and the proposed use of the proceeds must be an eligible use if the Operating Company were obtaining the financing directly; (2) The Eligible Passive Company (with the exception of a trust) and the Operating Company each must be small under the appropriate size standards in part 121 of this chapter; (3) The lease between the Eligible Passive Company and the Operating Company must be in writing and must be subordinated to SBA's mortgage, trust deed lien, or security interest on the property. Also, the Eligible Passive Company (as landlord) must furnish as collateral for the loan an assignment of all rents paid under the lease; (4) The lease between the Eligible Passive Company and the Operating Company, including options to renew exercisable solely by the Operating Company, must have a remaining term at least equal to the term of the loan; (5) The Operating Company must be a guarantor or a co-borrower (with the Eligible Passive Company) of the loan (in a 7(a) loan including working capital, the Operating Company must be a co-borrower); and (6) Each holder of an ownership interest constituting at least 20 percent of the Eligible Passive Company and the Operating Company must guarantee the loan (the trustee shall execute the guarantee on behalf of any trust). (b) Additional conditions that apply to trusts. The eligibility status of the trustor will determine trust eligibility. All donors to the trust will be deemed to have trustor status for eligibility purposes. A trust qualifying as an Eligible Passive Company may engage in other activities as authorized by its trust agreement. The trustee must warrant and certify that the trust will not be revoked or substantially amended for the term of the loan without the consent of SBA. The trustor must guarantee the loan. For purposes of this section, the trustee shall certify to SBA that: (1) The trustee has authority to act; (2) The trust has the authority to borrow funds, pledge trust assets, and lease the property to the Operating Company; (3) The trustee has provided accurate, pertinent language from the trust agreement confirming the above; and (4) The trustee has provided and will continue to provide SBA with a true and complete list of all trustors and donors. [61 FR 3235, Jan. 31, 1996; 61 FR 7986, Mar. 1, 1996, as amended at 64 FR 2117, Jan. 13, 1999] Uses of Proceeds A small business must use an SBA business loan for sound business purposes. The uses of proceeds are prescribed in each loan's Authorization. (a) A Borrower may use loan proceeds from any SBA loan to: (1) Acquire land (by purchase or lease); (2) Improve a site (e.g., grading, streets, parking lots, landscaping), including up to 5 percent for community improvements such as curbs and sidewalks; (3) Purchase one or more existing buildings; (4) Convert, expand or renovate one or more existing buildings; (5) Construct one or more new buildings; and/or (6) Acquire (by purchase or lease) and install fixed assets (for a 504 loan, these assets must have a useful life of at least 10 years and be at a fixed location, although short-term financing for equipment, furniture, and furnishings may be permitted where essential to and a minor portion of the 504 Project). (b) A Borrower may also use 7(a) and microloan proceeds for: (1) Inventory; (2) Supplies; (3) Raw materials; and (4) Working capital (if the Operating Company is a co-Borrower with an Eligible Passive Company, part of the loan proceeds may be applied for working capital if used for that purpose only by the Operating Company). (c) A Borrower may use 7(a) loan proceeds for refinancing certain outstanding debts. SBA will not authorize nor may a Borrower use loan proceeds for the following purposes (including the replacement of funds used for any such purpose): (a) Payments, distributions or loans to Associates of the applicant (except for ordinary compensation for services rendered); (b) Refinancing a debt owed to a Small Business Investment Company (“SBIC”); (c) Floor plan financing or other revolving line credit, except under §120.390; (d) Investments in real or personal property acquired and held primarily for sale, lease, or investment (except for a loan to an Eligible Passive Company or to a small contractor under §120.310); (e) A purpose which does not benefit the small business; or (f) Any use restricted by §§120.201 through 120.203 and 120.884 (specific to 7(a) loans and 504 loans respectively). (a) If the SBA financing (whether 7(a) or 504) is for the construction of a new building, a Borrower may permanently lease up to 20 percent of the Rentable Property to one or more tenants if the Borrower permanently occupies and uses no less than 60 percent of the Rentable Property, and plans to permanently occupy and use within three years some of the remaining space not immediately occupied and not permanently leased and plans to permanently occupy and use within ten years all of the remaining space not permanently leased. If the Borrower is an Eligible Passive Company which leases 100 percent of the new building's space to one or more Operating Companies, the Operating Company, or Operating Companies together, must follow the same rules set forth in this paragraph. (b) If the SBA financing (whether 7(a) or 504) is for the acquisition, renovation, or reconstruction of an existing building, the Borrower may permanently lease up to 49 percent of the Rentable Property if the Borrower permanently occupies and uses no less than 51 percent of the Rentable Property. If the Borrower is an Eligible Passive Company which leases 100 percent of the space of the existing building to one or more Operating Companies, the Operating Company, or Operating Companies together, must follow the same rules set forth in this paragraph. [68 FR 51679, Aug. 28, 2003] Ethical Requirements Lenders, Intermediaries, and CDCs (in this section, collectively referred to as “Participants”), must act ethically and exhibit good character. Ethical indiscretion of an Associate of a Participant or a member of a CDC will be attributed to the Participant. A Participant must promptly notify SBA if it obtains information concerning the unethical behavior of an Associate. The following are examples of such unethical behavior. A Participant may not: (a) Self-deal; (b) Have a real or apparent conflict of interest with a small business with which it is dealing (including any of its Associates or an Associate's Close Relatives) or SBA; (c) Own an equity interest in a business that has received or is applying to receive SBA financing (during the term of the loan or within 6 months prior to the loan application); (d) Be incarcerated, on parole, or on probation; (e) Knowingly misrepresent or make a false statement to SBA; (f) Engage in conduct reflecting a lack of business integrity or honesty; (g) Be a convicted felon, or have an adverse final civil judgment (in a case involving fraud, breach of trust, or other conduct) that would cause the public to question the Participant's business integrity, taking into consideration such factors as the magnitude, repetition, harm caused, and remoteness in time of the activity or activities in question; (h) Accept funding from any source that restricts, prioritizes, or conditions the types of small businesses that the Participant may assist under an SBA program or that imposes any conditions or requirements upon recipients of SBA assistance inconsistent with SBA's loan programs or regulations; (i) Fail to disclose to SBA all relationships between the small business and its Associates (including Close Relatives of Associates), the Participant, and/or the lenders financing the Project of which it is aware or should be aware; (j) Fail to disclose to SBA whether the loan will: (1) Reduce the exposure of a Participant or an Associate of a Participant in a position to sustain a loss; (2) Directly or indirectly finance the purchase of real estate, personal property or services (including insurance) from the Participant or an Associate of the Participant; (3) Repay or refinance a debt due a Participant or an Associate of a Participant; or (4) Require the small business, or an Associate (including Close Relatives of Associates), to invest in the Participant (except for institutions which require an investment from all members as a condition of membership, such as a Production Credit Association); (k) Issue a real estate forward commitment to a builder or developer; or (l) Engage in any activity which taints its objective judgment in evaluating the loan. [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 57980, Oct. 7, 2003] Credit Criteria for SBA Loans The applicant (including an Operating Company) must be creditworthy. Loans must be so sound as to reasonably assure repayment. SBA will consider: (a) Character, reputation, and credit history of the applicant (and the Operating Company, if applicable), its Associates, and guarantors; (b) Experience and depth of management; (c) Strength of the business; (d) Past earnings, projected cash flow, and future prospects; (e) Ability to repay the loan with earnings from the business; (f) Sufficient invested equity to operate on a sound financial basis; (g) Potential for long-term success; (h) Nature and value of collateral (although inadequate collateral will not be the sole reason for denial of a loan request); and (i) The effect any affiliates (as defined in part 121 of this chapter) may have on the ultimate repayment ability of the applicant. The aggregate amount of the SBA portions of all loans to a single Borrower, including the Borrower's affiliates as defined in §121.103 of this chapter, must not exceed a guaranty amount of $1,000,000, except as otherwise authorized by statute for a specific program. The maximum loan amount for any one 7(a) loan is $2,000,000. The amount of any loan received by an Eligible Passive Company applies to the loan limit of both the Eligible Passive Company and the Operating Company. [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 51680, Aug. 28, 2003] The following requirements are normally required by SBA for all business loans: (a) Personal guarantees. Holders of at least a 20 percent ownership interest generally must guarantee the loan. SBA, in its discretion, consulting with the Participating Lender, may require other appropriate individuals to guarantee the loan as well, except SBA will not require personal guarantees from those owning less than 5% ownership. (b) Appraisals. SBA may require professional appraisals of the applicant's and principals' assets, a survey, or a feasibility study. (c) Hazard Insurance. SBA requires hazard insurance on all collateral. (d) Taxes. The applicant may not use any of the proceeds to pay past-due Federal and state payroll taxes. Requirements Imposed Under Other Laws and Orders Under the Flood Disaster Protection Act of 1973 (Sec. 205(b) of Pub. L. 93–234; 87 Stat. 983 (42 U.S.C. 4000 et seq.)), a loan recipient must obtain flood insurance if any building (including mobile homes), machinery, or equipment acquired, installed, improved, constructed, or renovated with the proceeds of SBA financial assistance is located in a special flood hazard area. The requirement applies also to any inventory (business loan program), fixtures or furnishings contained or to be contained in the building. Mobile homes on a foundation are buildings. SBA, Lenders, CDCs, and Intermediaries must notify Borrowers that flood insurance must be maintained. Any holder of 50% or more of the ownership interest in the recipient of an SBA loan must certify that he or she is not more than 60 days delinquent on any obligation to pay child support arising under: (a) An administrative order; (b) A court order; (c) A repayment agreement between the holder and a custodial parent; or (d) A repayment agreement between the holder and a State agency providing child support enforcement services. (a) All loans must conform to requirements of Executive Orders 11988, “Flood Plain Management” (3 CFR, 1977 Comp., p. 117) and 11990, “Protection of Wetlands” (3 CFR, 1977 Comp., p. 121). Lenders, Intermediaries, CDCs, and SBA must comply with requirements applicable to them. Applicants must show: (1) Whether the location for which financial assistance is proposed is in a floodplain or wetland; (2) If it is in a floodplain, that the assistance is in compliance with local land use plans; and (3) That any necessary construction or use permits will be issued. (b) Generally, there is an 8-step decision making process with respect to: (1) Construction or acquisition of anything, other than a building; (2) Repair and restoration equal to more than 50% of the market value of a building; or (3) Replacement of destroyed structures. (c) SBA may determine for the following types of actions, on a case-by-case basis, that the full 8-step process is not warranted and that only the first step (determining if a proposed action is in the base floodplain) need be completed: (1) Actions located outside the base floodplain; (2) Repairs, other than to buildings, that are less than 50% of the market value; (3) Replacement of building contents, materials, and equipment; (4) Hazard mitigation measures; (5) Working capital loans; or (6) SBA loan assistance of $1,500,000 or less. If loan proceeds are for the construction or rehabilitation of a residential structure, lead-based paint may not be used on any interior surface, or on any exterior surface that is readily accessible to children under the age of seven years. When loan proceeds are used to construct a new building or an addition to an existing building, the construction must conform with the “National Earthquake Hazards Reduction Program (“NEHRP”) Recommended Provisions for the Development of Seismic Regulations for New Buildings” (which can be obtained from the Federal Emergency Management Agency, Publications Office, Washington, DC) or a code identified by SBA as being substantially equivalent. SBA and Intermediaries may not make or guarantee any loan within the Coastal Barrier Resource System. All SBA loans are subject to all applicable laws, including (without limitation) the civil rights laws (see parts 112, 113, 117 and 136 of this chapter), prohibiting discrimination on the grounds of race, color, national origin, religion, sex, marital status, disability or age. SBA requests agreements or evidence to support or document compliance with these laws, including reports required by applicable statutes or the regulations in this chapter. Enforceability Despite Rule Changes Regulations and contractual provisions in effect at the time of a transaction govern an SBA loan financing transaction, notwithstanding subsequent rule or contract changes. SBA may conduct an enforcement action regarding any violation of provisions of regulations or contracts applicable at the time, but no longer in effect or in use. Loan Applications An applicant for a business loan should apply to: (a) A Lender for a guaranteed or immediate participation loan; (b) A CDC for a 504 loan; (c) An Intermediary for a Microloan; or (d) SBA for a direct loan. For most business loans, SBA requires that an application for a business loan contain, among other things, a description of the history and nature of the business, the amount and purpose of the loan, the collateral offered for the loan, current financial statements, historical financial statements (or tax returns if appropriate) for the past three years, IRS tax verification, and a business plan, when applicable. Personal histories and financial statements will be required from principals of the applicant (and the Operating Company, if applicable). Applicants receive notice of approval or denial by the Lender, CDC, Intermediary, or SBA, as appropriate. Notice of denial will include the reasons. If a loan is approved, an Authorization will be issued. An applicant or recipient of a business loan may request reconsideration of a denied loan or loan modification request within 6 months of denial. Applicants denied due to a size determination can appeal that determination under part 121 of this chapter. All others must be submitted to the office that denied the original request. To prevail, the applicant must demonstrate that it has overcome all legitimate reasons for denial. Six months after denial, a new application is required. If the reconsideration is denied, a second and final reconsideration may be considered by the Associate Administrator for Financial Assistance (AA/FA), whose decision is final. Computerized SBA Forms Any Applicant or Participant may use computer generated SBA application forms, closing forms, and other forms designated by SBA if the forms are exact reproductions of SBA forms. Reporting of Fees An Applicant for a business loan must identify to SBA the name of each Agent as defined in part 103 of this chapter that helped the applicant obtain the loan, describing the services performed, and disclosing the amount of each fee paid or to be paid by the applicant to the Agent in conjunction with the performance of those services.
Title 13: Business Credit and Assistance
PART 120—BUSINESS LOANS
Subpart A—Policies Applying to All Business Loans
Eligibility Requirements
§ 120.100 What are the basic eligibility requirements for all applicants for SBA business loans?
§ 120.101 Credit not available elsewhere.
§ 120.102 Funds not available from alternative sources, including personal resources of principals.
§ 120.103 Are farm enterprises eligible?
§ 120.104 Are businesses financed by SBICs eligible?
§ 120.105 Special consideration for veterans.
§ 120.110 What businesses are ineligible for SBA business loans?
§ 120.111 What conditions must an Eligible Passive Company satisfy?
§ 120.120 What are eligible uses of proceeds?
§ 120.130 Restrictions on uses of proceeds.
§ 120.131 Leasing part of new construction or existing building to another business.
§ 120.140 What ethical requirements apply to participants?
§ 120.150 What are SBA's lending criteria?
§ 120.151 What is the statutory limit for total loans to a Borrower?
§ 120.160 Loan conditions.
§ 120.170 Flood insurance.
§ 120.171 Compliance with child support obligations.
§ 120.172 Flood-plain and wetlands management.
§ 120.173 Lead-based paint.
§ 120.174 Earthquake hazards.
§ 120.175 Coastal barrier islands.
§ 120.176 Compliance with other laws.
§ 120.180 Are rules enforceable if they are changed later?
§ 120.190 Where does an applicant apply for a loan?
§ 120.191 The contents of a business loan application.
§ 120.192 Approval or denial.
§ 120.193 Reconsideration after denial.
§ 120.194 Use of computer forms.
§ 120.195 Disclosure of fees.
