The Newest Transaction hurdle – SBA Form 1919
So here we are, the day before closing. The lender’s underwriter’s closing conditions have all been met, the buyer’s funds are with the closing attorney, and the loan and business transfer docs are ready. You can see the finish line ahead; you’ve even bought the congratulations bottle of champagne. Then comes a call from the loan closer demanding a signed SBA Form 1919 from an employee of the business you’re selling. The sale stops cold.
SBA Form 1919 is titled “Borrower Information Form” and it’s required with all SBA 7(a) loan programs. Basically the purpose of the form is to identify and then potentially disqualify “An Associate of Poor Character.” Straight from the SBA’s SOP’s : “The SBA cannot provide financial assistance to businesses with Associates who are incarcerated, on probation, on parole, who are currently under indictment for a felony or a crime of moral turpitude, or who are presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction…” The form asks questions like “ Have you ever been, other than a motor vehicle violation, convicted of a criminal offense”.
Seems simple enough, but the reality is that this form is wrecking all kinds of havoc. First, there’s no clear, all-encompassing definition of “associate.” Again from the SOP’s: “…the Agency requires that every proprietor, general partner, officer, director, managing member of a limited liability company (LLC), owner of 20% or more of the equity of the Applicant, … and any person hired by the Applicant to manage day-to-day operations must be of good character…” Second, if there is a “yes” checked on the form then we MUST request court transcripts, written explanations, Etc. This again is being requested from the employee, not the buyer or any principle of the entity.
Much of this is straightforward; especially the ownership elements and we have always supported the buyer’s requirement in regard to this form. But exactly who is it that’s managing day-to-day operations? Is it just the owner-operator, an employee general manager, every department manager, or for that matter every salesperson and anyone else who has signed an employment agreement? We’ve seen loan underwriters require one set of people complete the form, and then the loan closer afterwards add other employees. And don’t think for a second that every potential employee is going to be willing to complete and sign the form, even if they have a perfectly clear history. Does this prevent the financing?
To make it worse, most employees aren’t informed about the sale of the business until after the closing, or perhaps right before. If certain employees now have to complete the 1919 before the closing, that obviously means that they have to be informed ahead of time. If there is an issue, does the owner have to fire them in order to enable the sale to go through? Clearly there are lots of questions here, with some potentially serious consequences to the seller, the buyer, and even otherwise innocent employees.
Any positive response on this form will trigger an immediate request of the crime details, court transcripts and may even demand the SBA DC office to review and approve the application. The concern here is it could add up to 12 weeks to the process. Keep in mind that we discovered this concern a day or two prior to closing.
We don’t have any definite answers yet, but we are at the forefront of the effort to get a clear understanding of exactly who needs to complete the form. We’re working with the SBA as well as a number of top lenders, helping to get everyone on the same page and to reach a conclusion that makes sound lending and business sense.
And in the meantime, we continue to successfully navigate these tricky and potentially very dangerous waters, and have steered a number of potentially dicey closings to safe landings. Please feel free to call us and we’ll be happy to tell you about some of the solutions we’ve found that work.
Finally, please make sure that you and your clients are ready for the SBA Form 1919, and are partnering with a business loan source or lender who will work with you to properly manage this new and potentially very difficult challenge to your closings.
AskDiamond@easysba.com is always available for specific questions regarding this or other SBA rules.