You have questions, we have answers! To keep you informed and help you navigate through the SBA process, this Q&A section will keep you in-the-know and give you answers when you come across these questions and issues in your 7(a) loan projects.
This month, we take on questions regarding:
- Subsidy Recoupment Fees
- Equity Injections and Guarantees
- Collateral Requirements on 7(a) Standard Loans
Question #1:
Q: In regard to a Subsidy Recoupment Fee – does the fee apply to the entire amount that is prepaid on the SBA loan, or only the portion that is prepaid in excess of 25%?
A: The fee would apply to the entire amount that is prepaid. On page 50 of the SOP 50 10 7.1, there is a link to 13 CFR section 120.223. Below is that section of the CFR, which spells out the Subsidy Recoupment Fee in more detail than the SOP does:
Subsidy recoupment fee payable to the SBA by the Borrower.
- The subsidy recoupment fee is payable to SBA when:
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The loan has a maturity of 15 years or more. |
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The borrower makes a voluntary prepayment (or several prepayments in the aggregate) during any one of the first three successive 12 month periods following the disbursement of the loan. Prepayment is defined as a payment of principal in excess of the amount due according to the amortization schedule. |
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The prepayment (or several prepayments in the aggregate) is more than 25 percent of the highest outstanding principal balance of the loan in any one of the first three successive 12 month periods following the first disbursement. |
- When all of the conditions above exist, the following subsidy recoupment fees apply:
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If the prepayment is made during the first 12 month period after first disbursement, the charge is 5 percent of the total amount of all prepayments made during such period. |
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If the prepayment is made during the second 12 month period after first disbursement, the charge is 3 percent of the total amount of all prepayments made during that period. |
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If the prepayment is made during the third 12 month period after first disbursement, the charge is 1 percent of the total amount of all prepayments made during that period. |
Question #2:
Q: What would SBA’s standpoint be on a scenario where a portion of an equity injection came from an individual with no ownership vs. if that amount came from an individual with minority ownership? In either situation, would the individual be required to provide an unlimited guaranty? Would there be any other SBA requirements that we would need to consider?
A: If the individual providing a portion of the equity injection has no ownership in the applicant business, that individual would need to sign a Gift Letter to certify that no repayment of the funds is required. If the individual has ownership in the business, a Gift Letter would not be required.
As a general rule, SBA does not require a personal guarantee from anyone who owns less than 20% of the business (on a combined basis with their spouse if the individual is married). But the SBA does reserve the right to require a minority owner’s personal guarantee on a case-by-case basis. The following is from page 71 of the SOP 50 10 7.1:
When deemed necessary for credit or other reasons, SBA or, for a loan processed on a delegated basis, the SBA Lender, may require other appropriate individuals or entities to provide full or limited guaranties of the loan without regard to the percentage of their ownership interests, if any. For example, an individual with a minority ownership or no ownership interest in the Applicant or Operating Company who is critical to the operation of the business may be required to provide a personal guaranty (e.g., Supplemental Guarantors).
WBD worked on a 7a loan a few years ago where the ownership of the applicant business was 15% father and 85% son. The father was putting in most (if not all) of the equity injection and the son was young and just starting out so he didn’t have much personal wherewithal. After reviewing the 7a application, SBA decided they wanted personal guarantees from both the dad and son.
If the bank will be submitting the application GP (General Processing), it is possible that SBA could require a personal guarantee from the minority/non-owner who is providing a portion of the equity injection. If the bank will be approving the application under PLP authority, we would recommend considering a personal guarantee from the minority/non-owner. At a minimum, we would recommend commenting in the credit presentation why the institution is not requiring a guarantee from that individual (factoring in the strength of the majority owner’s guarantee, collateral coverage, debt service coverage, length of time the business has successfully been operating, etc.).
Question #3:
Q: If an applicant does not have enough collateral to cover an SBA loan in excess of $500,000, how does the SBA view that? There are no assets or real estate with the business so it would be personal assets and cash that support the loan.
A: For loans over $500,000 the following is required:
SBA requires the 7a loan to have the following collateral at a minimum:
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First security interest in any assets being acquired, refinanced or improved with loan proceeds. |
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Lien on available fixed assets including land, buildings, machinery and equipment owned by Applicant business or an EPC (real estate holding company). Please indicate lien positions the 7(a) loan will have. |
If a collateral shortfall remains after taking all assets described above, a mortgage on any 20% or more owner's personal RE (residential & investment property) must be taken on any property with LTV 75% or less. Liens on personal RE may be limited to the amount of the collateral shortfall, or 150% of the equity in the property.
Below are the maximum advance rates allowed when determining if the loan is fully secured:
- New machinery & equipment – 75% of cost.
- Used machinery & equipment – 50% of Net Book Value or 80% of Orderly Liquidation Appraised value.
- Furniture & fixtures – 10% of Net Book Value or appraised value.
- Accounts receivable & inventory – 10% of current book value.
- Improved real estate – 85% of appraised or estimated value.
- Unimproved real estate – 50% of appraised or estimated value.
If you have complied with the above and still remain under secured, SBA is okay with that; however, you do have to try to get to fully secured based on the liquidation advance rates noted above.
Hopefully the answers we provided will help you down the road or on current projects, but keep in mind that WBD's Lender Services Team is here to assist you with any 7(a) questions you may have. We stand ready to take on your projects should you choose to pass them along for us to process. We can be your one-stop shop! Give us a call at (608) 316-7143 or email to LenderServices@wbd.org.
