Two SBA Rules Every Borrower (and broker) Needs to Know!
By Steve Mariani
It never ceases to amaze me when I explain a few very important SBA rules that no one seems to be aware of that can make all the difference in a deal. As I travel the country and speak with brokers in so many states, I’ve realized that “most” SBA lenders have absolutely no interest in educating brokers, buyers or sellers of certain rules that can greatly benefit all the parties involved.
If you’ve ever sat in on one of my workshops you’ve probably heard me say that our firm’s first priority is to structure each loan request to best benefit all the parties involved in the transaction. “Parties” in this scenario does not include the lender at this structuring stage. Sounds confusing but it’s simple. Our approach is to structure the loan request utilizing every possible SBA rule that can benefit buyer and seller and then invite a lender to consider the transaction for financing. Having a complete understanding of the SBA SOP rule book is the difference and not clouding the transaction with various lender specific policies, which is so often the case. In today’s letter these two rules may surprise you as they do so many of our clients on a daily basis.
The first rule is that unless a borrower has 25% or more equity in the personal real estate the lender can “choose” to not lien that property. Key words to note below “SBA DOES NOT REQUIRE”
Actual SBA rule:
SBA does not require a Lender to collateralize a loan with real estate (including d)commercial, residential and investment properties owned by the Applicant or personally by the owners) to meet the “fully secured” definition when the equity in the real estate is less than 25% of the property’s fair market value. The Lender must document in their loan file the source (other than the personal financial statement) for making the determination of less than 25% equity.
What this rule actually means is that the lender can choose to lien property with any amount of equity but is not required to do so if equity is under 25%. Knowing the policies of many larger SBA lenders in the country I can personally tell you that some of the them choose to never utilize this rule and typically will always lien personal property explaining that SBA says we should. Well now you know, and this is just one case where the lenders can inject their own polices and not have it questioned by anyone. That being said, at our firm we pre-determine if the real estate should or should not be provided for collateral use prior to a lender injecting their “opinion”. Here is why this matters to you, the broker. If your transaction includes any type of seller financing and that note is subordinate to an SBA loan (which it will always be) then with the borrower’s properties being free from lender liens this allows the seller to levy a lien securing their promissory note. This puts your seller in a much stronger position as opposed to only being second to the SBA lender’s position. Many times it makes the difference.
The next rule that we find surprising to most borrowers is the fact that their spouse does not necessarily have to guaranty the loan. When discussing the spouse of a borrower there are a few deciding factors that will determine their actual involvement and level of guaranty. The first is the spouse’s actual operational involvement in the transaction. Meaning that if this spouse is being considered for daily the operation of the business in any way then that resume’ must be secured by a personal guaranty. The spouse’s guaranty will also be required if that spouse provides the supporting salaries of the household of the buyer. Meaning that if the borrower is relying on their spouse for supporting their household then they will be required to guaranty the loan in it’s entirety. If neither of these scenarios exist we find no reason to request the guaranty of the spouse and will demand they be left off the loan. Keeping in mind that if we are taking collateral owned by both the borrower and their spouse that this outside spouse will be required to sign a “limited” guaranty limited to their ownership interest in that specific collateral but nothing more.
We describe these rules because we are confronted with this situation frequently and our borrowers are typically surprised and value these rules and our approach when providing financing options.
In the end I must always believe everyone’s goal remains the same, a successful and mutually rewarding closing.
Diamond Financial, building broker success since 1996 with a 3 day yes or no policy and a 94% closure rate.
AskDiamond@easysba.com is always available for specific questions regarding this or other SBA rules.