SBA Eliminates the “Personal Resources Test”

Posted on Friday, April 11th, 2014

The U.S. Small Business Administration (“SBA”) recently released its Final Rule for its updates to the popular 504 and 7(a) loan programs. Before April 21, 2014, an applicant for one of these popular SBA loans was required to show that the desired funds were not available from the personal resources of any owner of 20% or more of the equity of the applicant (what was commonly called, the “personal resources test”). Upon receipt of an application that showed available resources for any such owner, the SBA, under 13 C.F.R. 120.102, previously required (according to a formula) that certain personal resources be used to contribute to the borrower or project to reduce the loan amount needed (i.e. the SBA required certain owners of an SBA loan applicant to inject personal liquid assets into the borrowing entity to reduce the amount of SBA guaranteed funds that would otherwise be needed or were originally applied for).

In an attempt to allow more robust borrowers to participate in SBA loan programs, reduce risk to the SBA’s loan portfolio, and increase the type and number of borrowers for these flagship business loan programs, the “personal resources test” will be eliminated as of April 21, 2014. NOTE: The elimination of the “personal resources test” does not eliminate the requirement under 13 C.F.R. 120.101, that credit is “not otherwise available on reasonable terms from non-Federal sources” or prohibit a lender from requiring that personal assets be injected into a borrower or pledged as collateral for a loan if prudent lending so requires.

The Final Rule also eliminated the “9 Month Rule,” under 13 C.F.R. 120.882, which limited  expenses eligible for 504 financing to those incurred 9 months prior to receipt by the SBA of a complete loan application, unless the 9 Month Rule was waived or extended by the SBA. As of April 21, 2014, expenses may generally be financed under the 504 Loan Program regardless of when they were incurred, as long as such expenses are directly attributable to the 504 project.

SBA loan programs remain viable financing options for many start-ups, entrepreneurs, and established businesses. However, a careful business owner will seek counsel before becoming a personal guarantor for any debt or when repayment options or loan modifications need to be explored. Michael Howard has experience with SBA matters and has provided counsel in connection with the SBA’s Offer in Compromise program.