SBA Information Notice 5000-848663: Issuance of SOP 50 10 7.1
Summary
SBA Information Notice, Control No. 5000-848663, effective October 25, 2023, to SBA employees, 7(a) lenders, certified development companies, and applicants and borrowers of the 7(a) and 504 loan programs. It announces the issuance of Standard Operating Procedure (SOP) 50 10 7.1, Lender and Development Company Loan Programs. The SOP covers the 7(a) and 504 loan programs.
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Full text
SBA Information Notice
TO: All SBA Employees and 7(a) Lenders, and CONTROL NO.: 5000-848663
Certified Development Companies, Applicants and
Borrowers of the 7(a) and 504 Loan Programs
SUBJECT: Issuance of SOP 50 10 7.1 EFFECTIVE: October 25, 2023
The purpose of this Notice is to inform 7(a) Lenders, Certified Development Companies (CDCs),
together known as “SBA Lenders,” SBA employees, and Applicants and Borrowers of the 7(a)
and 504 Loan Programs of the issuance of Standard Operating Procedure (SOP) 50 10 7.1,
Lender and Development Company Loan Programs.
SOP 50 10 7.1 will become effective Nov. 15, 2023, and will apply to all applications received
by SBA on or after that date. SBA Lenders and SBA employees must continue to use SOP 50 10
7 for 7(a) and 504 applications submitted through Nov. 14, 2023.
The revised language includes but is not limited to:
SECTION A: CORE REQUIREMENTS FOR ALL 7(A) AND 504 LOANS
The chapters listed below have received updated titles.
Chapter 1: Primary Applicant Eligibility Requirements Validated by SBA’s Risk Mitigation
Framework
Chapter 2: Credit Not Available Elsewhere, Special Transaction Structures, & Other Primary
Applicant Eligibility Requirements
Chapter 1: Primary Applicant Eligibility Requirements Validated by SBA’s Risk
Mitigation Framework
SBA determination of whether the Applicant meets primary eligibility requirements:
Clarified that SBA will make the final determination as to the eligibility of the Applicant for all
eligibility requirements stated in Section A, Chapter 1, using SBA’s Risk Mitigation Framework.
Added language that SBA Lenders must not submit an application that the SBA Lender knows is
not eligible, regardless of the Applicant’s certification. SBA Lenders have the ability to conduct
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a pre-check in E-Tran before submitting a loan application to determine whether SBA’s Risk
Mitigation Framework will flag any eligibility issues for the Applicant. Prior to receiving an
SBA loan number, all SBA Lenders must digitally submit a completed loan application and the
loan terms and conditions to SBA.
Paragraph A. Applicant Certification: Edited the certification made by the applicant.
Paragraph D. Located in the United States: Added text stating that if an Applicant has
international operations, the loan proceeds must be used exclusively for the benefit of the
domestic operations.
Paragraph E.:
1.d. Clarified that for loans structured with an EPC and OC, only the OC is examined for size
and affiliation. However, in accordance with 13 CFR § 120.151, the amount of any loan received
by an EPC applies to the loan limit of both the EPC and the OC.
4.a.vi., Affiliation based on ownership: Clarified that when spouses and minor children jointly
own a business, their ownership interests must be combined when determining the amount of
ownership interest. Ownership interests are not combined when spouses and minor children have
individual ownership interests in different businesses.
Paragraph F., Types of Ineligible Businesses: Added explanatory text regarding passive
businesses.
Chapter 2: Credit Not Available Elsewhere, Special Transaction Structures, & Other
Primary Applicant Eligibility Requirements
Paragraph A, Credit Not Available Elsewhere: Added clarifying text that there is no
requirement for written justification in the SBA Lender’s credit memorandum beyond simply
indicating one or more reasons from a list of the acceptable factors that support the SBA
Lender’s certification.
Paragraph C, Primary Applicant Eligibility Requirements Verified by the SBA Lender:
Added text clarifying the types of ineligible businesses that the SBA Lender is responsible for
determining with respect to the Applicant’s eligibility.
Chapter 3: Uses of Proceeds
Paragraph B., Restrictions on uses of proceeds: Added the regulatory language from 13 CFR
§ 120.881, for the 504 Loan Program only, that loan proceeds may not be used to finance the
relocation of the Applicant out of a community, if there will be a net reduction of one-third of its
jobs for an Applicant or a substantial increase in unemployment in any area of the country (with
exceptions).
Paragraph C: Occupancy and Leasing Requirements: Added clarifying language.
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Chapter 4: Ethics, Fees, and Agents
Paragraph C.2., Fees and expenses the Lender may collect from the Applicant or
Borrower: Edited the requirements for content and clarity and consistent with 13 CFR §
120.221.
Paragraph C.2.a.iii: Clarified that, as part of its service and packaging fee, Lenders may charge
fees associated with technology services (whether developed internally or purchased from a third
party) on a pro rata basis for software or technology used in connection with preparing SBA loan
documents, underwriting, or closing the SBA-guaranteed loan. These fees may not be charged as
an out of pocket expense.
Chapter 5: Other Core Requirements
Paragraph A: Guaranties:
Formerly 4., “Reducing Ownership Interest”: Deleted this paragraph because it was causing
confusion regarding partial changes of ownership. It is SBA’s intention that for an SBA loan
being used to finance a complete change of ownership, the seller, who no longer has any
ownership in the business, is not required to provide a guaranty. Additionally, for 7(a) loans for
partial changes of ownership, SBA will measure percentage of ownership post-sale for the
purpose of determining who is required to provide a guaranty.
New 4., Substitution of Personal and/or Corporate Guaranty Liability: Added language that
permits substitution of personal and/or corporate guaranty liability. SBA allows third-party
individuals or entities to assume the liability of a personal or corporate guaranty, as applicable,
for the guaranty of the individuals and/or entities that would otherwise be required to make a
personal or corporate guaranty for an SBA loan. If the personal or corporate guaranty liability is
assumed by a separate entity or individual, the substitute guarantor must have a similar or greater
value, and the personal/corporate guaranty liability agreement or transfer agreement must be
submitted to the SBA Lender as part of the complete loan package. If a substitute guarantor will
be used, SBA Lender must identify in the E-Tran terms and conditions both the substituted
guarantor and the individual or corporate entity being substituted, and if applicable, the
personal/corporate guaranty liability agreement or transfer agreement must be submitted to the
SBA Lender as part of the complete loan package.
Paragraph B., IRS tax transcript/verification of financial information: Edited this section
for content and clarity.
Paragraph C.1.a., Insurance requirements: Clarified that for 504 loans of all sizes, SBA
requires hazard insurance on what is being acquired, refinanced, or improved by the 504 loan.
Paragraph C.3., Flood insurance:
C.3.a.: Clarified that SBA flood insurance requirements are based on the Standard Flood Hazard
Determination (FEMA Form 086-0-32 or its successor). The mandatory purchase of flood
insurance will be required as set forth by the provisions of the National Flood Insurance Program
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Must be accompanied by SBA Form 58
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(NFIP) and the Interagency Questions and Answers Regarding Flood Insurance at 12 CFR §22,
12 CFR §208, 12 CFR §339, 12 CFR §614 and 12 CFR §760.
C.3.c.: Clarified that if an SBA Lender is taking the business real estate as collateral, and if the
loan proceeds are being used to refinance, acquire, install, improve, construct, or renovate real
estate and/or machinery and equipment, the loan recipient must obtain flood insurance on the
collateral and its contents if it is located in a special flood hazard area.
Paragraph F, Special-Purpose Credit Programs: Added text stating that SBA’s lending
programs qualify as “Special-Purpose Credit Programs” under the Equal Credit Opportunity Act
(ECOA). This regulation stipulates that information pertaining to the Applicant’s marital status,
sources of personal income, alimony, child support, and spouse’s financial resources can be
obtained and considered in determining program eligibility. Therefore, SBA and/or the SBA
Lender has the right to obtain the signature of an Applicant’s spouse (whether an owner of the
business or not) or other person on an application or credit instrument if it is required by Federal
or State law.
SECTION B: 7(A) LOAN PROGRAM SPECIFIC REQUIREMENTS
For all 7(a) loan delivery methods: Revised guidance to state that Lenders must list in E-Tran
all Beneficial Owners of at least 20 percent of the Applicant and at least 51 percent of the total
Beneficial Owners of the Applicant. Additionally, Lenders must submit the required information
from SBA Form 1919 into E-Tran, but Lenders are not required to upload the form itself into E-
Tran. Lenders must retain the signed SBA Form 1919 in the loan file.
Loan maturities – For all 7(a) loan delivery methods, clarified:
For loans to acquire equipment, fixtures, or furniture, maturity may be up to 15 years if the IRS
asset class useful life supports the term.
Loans for leasehold improvements (except for leasehold interests in land) may be up to 10 years,
plus an additional period reasonably necessary to complete the leasehold improvements.
For mixed-purpose loans, when loan proceeds are used for multiple purposes (land and building,
working capital, machinery & equipment, or the refinancing of any of these purposes), the
maturity may be a blended maturity or, if 51% or more of the use of proceeds are for real estate,
the maximum maturity may be up to 25 years.
Collateral – For all 7(a) loan delivery methods: Included the regulatory prohibition at 13 CFR
§ 120.411 that prohibits Lenders from taking any action in connection with an SBA-guaranteed
loan that establishes a preference in favor of the Lender, and further prohibits the Lender from
having a 7(a) loan in a piggyback structure.
Debt refinance - For all 7(a) loan delivery methods:
Added the regulatory prohibition at 13 CFR § 120.130(b) that states a 7(a) loan may not be used
to refinance a debt owed to a Small Business Investment Company (SBIC) or a New Markets
Venture Capital Company. Added language clarifying when a Lender may refinance its own
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same institution non-SBA guaranteed debt or its own or another SBA Lender’s SBA-guaranteed
loan.
Clarified that in accordance with 13 CFR § 120.452, a Lender may not use PLP delegated
authority to reduce the Lender’s credit exposure to the Applicant; therefore, Standard 7(a) and
7(a) Small loans that reduce a Lender’s credit exposure to the Applicant must be processed under
non-delegated authority. However, SBA Express Lenders may process loans that reduce the SBA
Express Lender’s credit exposure to the Applicant under SBA Express authority.
Debt refinance – For Standard 7(a), 7(a) Small, and SBA Express:
Clarified that in order to be eligible for refinancing, the debt must be, and must have been,
current for at least the last 12 months or for the life of the loan, whichever is less.
Changes of ownership - For 7(a) delivery methods that allow these transactions, clarified:
Loan maturity for a complete change of ownership may be up to 25 years only when the
purchase price includes the commercial real estate from which the Applicant business operates
(i.e., is not investment or personal real estate) and when the value of the commercial real estate is
51% or more of the purchase price. Otherwise, the maximum maturity is 10 years. The maximum
loan maturity for change of ownership between existing owners and for partial changes of
ownership is 10 years.
A complete partner buyout or a partial change of ownership is by its nature a transaction based
on the redemption or sale of stock for equity in the business; therefore, the loan maturity is
limited to a maximum of 10 years.
Seller earnouts are prohibited; however, buyer rebates based on business performance are
allowed because this is a benefit to the Borrower. If the Borrower receives funds based on the
rebate, it should first be applied to pay down the 7(a) loan to a point that will not trigger a
subsidy recoupment fee, and any remaining funds may be used for business purposes.
The maximum 7(a) loan uses of proceeds for the change of ownership is capped at the business
valuation amount. When the business valuation is lower than the sales agreement, the shortfall
may be financed with a non-guaranteed loan as long as it is subordinate to the 7(a) loan.
Clarified when a seller may remain as an officer, director, stockholder, or employee of the
business.
Chapter 1: Standard 7(a) Loans
Standard 7(a) loans, Changes of Ownership, Equity - Section B, Chapter 1, Para. C.2.b.,
clarified:
For changes of ownership resulting in a new owner (complete change of ownership):
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At a minimum, SBA requires an equity injection of at least 10 percent of the total project costs,
(all costs required to complete the change of ownership, regardless of the source of funds) for
such transactions.
Seller debt may not be considered as part of the equity injection unless the seller’s loan does not
include a balloon payment and, for the first 24 months of the 7(a) loan, the seller debt is on either
(a) full standby; or (b) partial standby (interest payments only being made) and the Applicant’s
historical business cash flow supports the ability to make the payments, and at least a quarter of
the SBA-required equity injection is from a source other than the seller.
For changes of ownership between existing owners and for partial changes of ownership: When
required, cash contribution can be either an amount sufficient to reflect a debt-to-worth ratio of
no greater than 9 to 1 on the pro form balance sheet or in the amount of at least 10% of the
purchase price of the business, as reflected in the purchase and sale agreement, whichever is less.
Standard 7(a) loans, Real estate appraisal and business valuation requirements – Section B,
Chapter 1, Para. C.3.: Added the Small Business Act requirement that for all Standard 7(a)
loans secured by commercial real property, all Lenders must obtain an appraisal by a State
licensed or certified appraiser.
Chapter 2: 7(a) Small Loans & SBA Express
Maximum loan amount for 7(a) Small and SBA Express – Para.B.1.: Clarified that 7(a)
Small loans have a maximum loan amount of $500,000 per project, including other 7(a) loans
made within 90 days. The maximum aggregate SBA Express loan amount is $500,000 (gross),
inclusive of all outstanding SBA Express, Community Advantage, Community Express, and
Patriot Express loans the Applicant and its Affiliates may have.
Underwriting 7(a) Small loans – Para.C.2.a.: Clarified the loan submission process using
delegated and non-delegated authority when the loan receives a satisfactory score and when it
does not receive a satisfactory score.
Collateral – Clarified that for loans over $50,000, the Lender must follow the written collateral
policies and procedures that it has established and implemented for its similarly-sized, non-SBA
guaranteed commercial loans, except that SBA does not require a Lender to place a lien on non-
business assets such as personal homes even if it is the Lender’s policy to do so.
Real estate appraisal and business valuation requirements – Para.B.3.: Revised the
requirements for appraisal and business valuation.
Chapter 5: E-Tran Terms and Conditions through Disbursement for all 7(a) Loans
Clarified SBA does not require signatures on the E-Tran terms and conditions.
Added construction loan provisions in accordance with the regulatory requirement at 13 CFR §
120.200 and providing for a blanket waiver of the requirement for a payment and performance
bond.
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Clarified the required Note terms for loans that will be sold on the secondary market.
Clarified that the E-Tran terms and conditions must include collateral and lien priority.
Clarified requirements for licenses. The Lender must obtain evidence from the Borrower of all
licenses required to operate the business within no more than 90 days after final disbursement of
the loan. The loan may not be sold into the secondary market until all required licenses are
obtained.
Section C: 504 Loan Program Specific Requirements
Chapter 1: Eligibility through Submission of Application
Paragraph A.2.b.iii., Clarified that loans to Small Manufacturers and eligible Energy Public
Policy Projects are excluded from CDC’s portfolio job opportunity average.
Paragraph C.10.h, Updated the debt refinance without expansion policy to conform to SBA
Policy Notice 5000-847732.
Paragraph C.11.b.vi.c), Clarified loans with balloon payments meet the Substantial Benefit test
independent of the 10% reduction requirement.
Paragraph C.15 Businesses owned by ESOPs, added a new paragraph for businesses owned by
ESOPs.
Paragraph E.1.c.i, Borrower’s Contribution, clarified that the Borrower’s contribution may
consist of borrowed funds (subordinate to the Third-Party loan and the 504 debenture, and,
without SBA’s written approval, may not be repaid at a faster rate than the 504 loan).
Paragraph E.l.c.i.c)ii., Borrower’s Contribution, clarified the Borrower’s contribution for new
business and special/single purpose properties in accordance 13 CFR § 120.910.
Paragraph F.2., Contents of a 504 Loan Application, clarified SBA Form 1244, “Application
for Section 504 Loan,” must list all Beneficial Owners of at least 20% of the Applicant, and at
least 51% of the total Beneficial Owners of the Applicant.
Chapter 2: SBA E-Tran Terms and Conditions through Disbursement
Paragraph C.1.b., clarified that the Interim Lender must make certifications at the time of
debenture closing as stated in SBA Form 2288 and 13 CFR §§ 120.891 and 120.892.
APPENDIX 3: DEFINITIONS
New Business: Added a clarification that when an existing business starts or acquires a business
that is in the same 6-digit NAICS code with identical ownership and in the same geographic area
as the acquiring entity and they are co-borrowers, SBA considers this to be a business expansion
and not a new business.
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Rural Area: Changed the website for where the Census Bureau’s urban-rural classification and
the Census Bureau’s County Classification Lookup Table can be found. Urban and Rural
(census.gov)
Supplemental Guarantor: Added language indicating a non-owner spouse who is required to
provide a limited guaranty in order to secure a lien on jointly owned personal real estate is not a
Supplemental Guarantor, because in this case the guaranty is mandatory.
Questions:
Questions concerning this Notice may be directed to the Lender Relations Specialist in the local
SBA Field Office.
Kathryn Frost
Associate Administrator (Acting)
Office of Capital Access
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