Mar 25, 2014

Small Business Administration Eliminates Personal Resource Test for 504 and 7(a) Loan Programs

Alert | Small Business Alert

On March 21, 2014 the U.S. Small Business Administration (SBA) issued its final rule in Federal Register Vol. 79, No. 55, regarding the personal resource test for the 504 and 7(a) Loan Programs. The final rule eliminates this test for loan applicants. Previously, an applicant for a business loan needed to show that there were not funds available from the personal resources of any owner of 20% or more of the equity of the applicant. If such funds were available, the SBA required that those funds be used as part of the applicant’s equity contribution to the project thereby reducing the amount of the loan. If the 20% owner’s liquid assets exceeded certain thresholds then certain defined amounts would be required to be contributed to the project by the 20% owner. 

This rule eliminating the personal resource test will be effective April 21, 2014.   

The rule also eliminated what has been referred to as the 9-month rule for SBA 504 loans set forth in 13 C.F.R. 120.882(a). This rule had provided that only expenses made towards a project within 9 months prior to receipt of a completed loan application could be considered eligible project costs unless the time limit was extended or waived by the SBA. Costs, regardless of when those costs were made, may be considered eligible project costs provided they are directly attributable to the project being financed. 

The final rule also made various changes to certified development companies’ operational and organizational requirements that will be effective April 21, 2015. The final rule also modified the liquidation of additional collateral held by third-party lenders in connection with SBA 504 loans, and the application of the proceeds from such collateral. The final rule did not make any changes to SBA affiliation rules. The final rule is attached as a PDF file.

For further information, please contact Mark L. Sarlson at 216.615.4855 or  Follow Mark on Twitter @msarlson1.


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