Minority Investor Update for the SBA Loan Programs

Earlier this year a lot of concern hit the SBA 7A world related to SBA authorizations being denied due to minority investors (those that own under 20% of the business) associated with new loans having previously been associated with SBA loans that have gone bad. The SBA was providing a blanket denial of those loan authorizations, which often required Borrowers to retool their equity table. Worse, it created fear in the investor community that minority investors would be penalized going forward from accessing the SBA program or investing in other transactions. I do not think the minority investor was a concern in the past because the SBA was not tracking minority investors at the same level they are now due to the new citizen requirements. Effective June 1st, the SBA has formally clarified their eligibility policy related to minority investors in SBA transactions. Specifically the updated guidance provides for the following: "Therefore, in supporting greater access to capital and recognizing the capital raising challenges for small businesses, while acknowledging that having a small, non-controlling equity interest in a defaulting business should not automatically preclude an entrepreneur from having future access to SBA financial assistance, SBA has determined there is good cause to use its waiver authority under 13 CFR###-###-#### q) to east the restrictions against a responsible Applicant whose owners held such interests in a business which defaulted on an Agency loan and resulted in a loss to the government." In order to qualify for a waiver, three conditions must be met: 1) The Applicant must have held less than 20% of the equity of the business prior to the loss; 2) the Applicant was not a guarantor or co-borrower on the defaulted SBA loan; 3) the Applicant did not have any control over the business and was a "Non-controlling Minority Equity Investor". If those conditions are met and a detailed summary of the default and how the Applicant was not impacted is provided to the SBA as part of a waiver request, the SBA will review that waiver. There is not a guarantee the SBA will provide a waiver. The SBA says it will review the amount of the loss, the potential involvement of the Applicant, as well as how many other transactions the Applicant has been involved with where there was a loss. But generally speaking, it sounds like if the above three conditions are met a waiver should be achievable. My recommendation would be to check with all equity investors and verify if they are aware of any past losses on investments they have made up front. If they are, I would secure the information for a waiver request up front so you can get out in front of it, and in case the waiver is not ultimately approved, have backup investors available. I do believe this is very positive news to the industry. If you would like to understand this or any of the SBA rules better, you can reach me here or directly at redacted