SBA SOP 50 10 8, C.Ch1.E — CREDIT STANDARDS
Verbatim text of SBA SOP 50 10 8 section C.Ch1.E (CREDIT STANDARDS), effective 2025-06-01. 32 provision(s) quoted from the SOP PDF. SBA's own document page serves superseded editions, and the SOP is further amended by policy notices — read this with the notices that touch it.
Verbatim regulatory text
Verbatim provisions from SBA SOP 50 10 8, C.Ch1.E — CREDIT STANDARDS — each quote is a verified substring of the regulator-published source snapshot, not retyped. Quoted for reference; this is not legal advice. The operational layer (P&P updates, prompts) lives in the regulation update kits.
SOP 50 10 8 C.Ch1.E
E. CREDIT STANDARDS The policies that make up SBA’s credit standards begin with the requirements outlined in 13 CFR §§ 120.101 and 120.150. This section provides procedural guidance as to what the Lender should or must consider when analyzing any request for financial assistance that will be guaranteed by SBA. Certified Development Companies (CDCs) must analyze each application in a commercially reasonable manner, consistent with prudent lending standards. The analysis must be acceptable to SLPC. On 504 loans, the cash flow of the Applicant is the primary source of repayment, not any expected recovery from the liquidation of collateral. Thus, if the CDC’s financial analysis demonstrates that the Applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available. The credit strengths and weaknesses of the proposed project must be identified and discussed by the CDC along with any mitigating factors. 1. CDC Credit Memorandum The CDC’s credit memorandum must address the following:
SOP 50 10 8 C.Ch1.E.1.a
a. Pro-Forma Balance Sheet Analysis i. A pro-forma balance sheet is created from a current business balance sheet that has been adjusted for all changes in assets and liabilities as a result of the Project, including the Third Party Loan, 504 loan, other new debt, any required equity injection, the use of loan proceeds, and the costs of getting the loan(s) (such as fees and closing costs). ii. The pro-forma balance sheet analysis must include a complete debt schedule and discussion on the types and terms of the existing loans, debt, or credit facilities. iii. The CDC must identify and discuss issues resulting from any anomalies or variances on the balance sheet.
SOP 50 10 8 C.Ch1.E.1.b
b. Repayment Ability Analysis The analysis must address the following: i. If the Applicant is meeting SBA Size Standards under the: a) Alternative Size Standards – Include balance sheets, income statements, and Federal income tax returns for the previous 2 years, or the number of years the Applicant has generated revenue, whichever is less, b) Industry Size Standard–- Include balance sheets, income statements, and Federal income tax returns for the previous 3 years, or the number of years the Applicant has generated revenue, whichever is less. ii. The repayment ability analysis must address debt service coverage. Debt Service is defined as the future required principal and interest payments on all business debt inclusive of new SBA loan proceeds. The Applicant’s debt service coverage ratio (operating cash flow divided by debt service) must be equal to or greater than 1:1 based on calculations acceptable to SLPC. iii. If the historical cash flow does not show sufficient debt service coverage after the effects of the SBA loan, the CDC must analyze projections in accordance with Subparagraph v., “Projection-based projects,” below.
SOP 50 10 8 C.Ch1.E.1.b.iv
iv. Balance sheet and income statement dated within 120 days prior to submission to SBA, including analysis of debt service coverage, aging of accounts receivable and accounts payable. v. Projection-based projects: a) For projection-based projects, the analysis must include a minimum of 2 years of projections. b) The CDC must calculate the projected debt service coverage and provide the assumptions supporting the projected cash flow coverage. c) The analysis must support and justify the reasonableness and attainability of the assumptions, including as applicable:
SOP 50 10 8 C.Ch1.E.1.b.i
i) Justification for anticipated sales volume and/or revenue growth as a result of new product lines, sales channels, and new production facilities; ii) Justification for any reduction in expenses; and iii) Comparison to current industry trends. d) If the projections show repayment in Year 2 but not in Year 1, sufficient liquidity must be shown to cover the shortfall in Year 1. e) If applicable, the CDC must describe how the Applicant will make interest payments and pay for operations during construction.
SOP 50 10 8 C.Ch1.E.1.c
c. Borrower’s Contribution i. The Borrower must contribute cash (or property acceptable to SBA obtained with the cash) or land (that is part of the Project Property) to the Project, or funds that were borrowed (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), in an amount equal to the following, excluding administrative costs: a) All Borrowers must contribute at least 10%, which may be borrowed as long as it is subordinate to the Third Party Loan and the 504 debenture; b) New businesses must contribute at least 15%. The Debenture will finance no more than 35% of the Project and at least 50% of the Project financing will be from banks or other financial institutions, state or local government, or foundations or other non-profit institutions. c) Businesses with a Limited or Special Purpose Property:
SOP 50 10 8 C.Ch1.E.1.i
i. Must contribute at least 15%, in which case the Debenture will finance no more than 35% of the Project and at least 50% of the Project financing will be from banks or other financial institutions, state or local government, or foundations or other non-profit institutions.
SOP 50 10 8 C.Ch1.E.1.i.ii
ii. Must contribute at least 20%, if the Project involves a new business 13 CFR § 120.910. iii. If the Borrower contributes at least 20% under this Paragraph c), the Debenture will finance no more than 30% of the Project and at least 50% of the Project financing will be from banks or other financial institutions, state or local government, or foundations or other non- profit institutions. iv. SBA allows Borrower’s equity in equipment to be counted toward Borrower Contribution in 504 debt refinancing with and without expansion if the debt was originally used to acquire the specific equipment. The Borrower’s equity in land and/or buildings and/or equipment previously acquired may be counted toward the Borrower’s contribution if the land and/or buildings and/or equipment are part of the Project. v. CDCs must address whether the Project Property is Limited or Special Purpose in their credit memorandum and include an explanation of their conclusion.
SOP 50 10 8 C.Ch1.E.1.v.vi
vi. Below is a list that contains examples of properties that SBA considers to be a Limited or Special Purpose Property. This list is not intended to be all-inclusive and SBA may determine that other properties meet the Limited or Special Purpose Property definition. a) Amusement parks; b) Bowling alleys; c) Car wash businesses; d) Cemeteries; e) Cold storage facilities where more than 50% of total square footage is equipped for refrigeration; f) Dormitories; g) Farms, including livestock and dairy facilities; h) Funeral homes with crematoriums; i) Gas stations; j) Golf courses; k) Hospitals, surgery centers, urgent care centers, and other health or medical facilities; l) Hotels, motels, and other lodging facilities; m) Marinas; n) Mines; o) Nursing homes, including assisted living facilities; p) Oil wells; q) Quarries, including gravel pits; r) Railroads; s) Sanitary landfills; t) Service centers (e.g., oil and lube, brake, or transmission centers) with pits and in-ground lifts; u) Sports arenas; v) Swimming pools; w) Tennis clubs; x) Theaters and auditoriums; and y) Wineries. d) If a Project will finance both a New Business and a Limited or Special Purpose Property, the Applicant must contribute at least 20% of the Project cost. The Debenture will finance no more than 30% of the Project and at least 50% of the Project financing will be from state or local government, banks or other financial institutions, foundations or other non-profit institutions. ii. The additional Borrower’s contribution will reduce the SBA’s portion of the financing. iii. The Borrower’s equity in land and/or buildings previously acquired may be counted toward the Borrower’s contribution if the land and/or buildings are part of the Project. iv. If the Borrower’s contribution is borrowed: a) Any lien position on the Project Property must be subordinate to the 504 loan; b) Only in situations where the borrowed contribution is collateralized by the Project Property, Borrower may not pay the loan for its contribution at a faster rate than the 504 loan (13 CFR § 120.912) unless it is approved in writing by the D/FA or designee; and c) If the borrowed contribution is collateralized by assets other than the Project Property, the Borrower must demonstrate repayment of the loan for its contribution from the cash flow of the business or other sources.
SOP 50 10 8 C.Ch1.E.1.d
d. Additional Borrower’s Contribution and/or Collateral The required Borrower’s contribution, as set forth in Paragraph 1.c. immediately above, and collateral, as set forth in Paragraph 2.a. of this Chapter below, on SBA 504 loans are the minimums required by policy. However, in some cases it may be appropriate to consider additional Borrower contribution and/or collateral to mitigate the credit weaknesses of a proposed project. Examples of such credit weaknesses include: i. Marginal historical or projected cash flow; ii. Limited working capital; iii. Recent significant increase in debt; iv. Restricted or limited customer base;
SOP 50 10 8 C.Ch1.E.1.v
v. Limited or no net worth. This list is not intended to be all-inclusive and SBA may determine that other circumstances necessitate additional Borrower contribution and/or collateral.
SOP 50 10 8 C.Ch1.E.1.e
e. Global Cash Flow Analysis The following may be included in the global cash flow analysis. Note: Repayment ability is determined based on the operating company cash flow analysis. i. Personal discretionary income analysis with outside income: a) Any income not generated from the Applicant, such as spousal income, affiliate income, or interest income is considered outside income. b) Outside income can be used to offset personal obligations and living expenses. However, outside income may not be added to the business cash flow because repayment ability analysis must be based on the cash flow of the business.
SOP 50 10 8 C.Ch1.E.1.e.ii
ii. Rental Income Anticipated cash flow from rental income from the Project Property may be included in the global cash flow analysis. However, it must not be included in the repayment ability analysis.
SOP 50 10 8 C.Ch1.E.1.f
f. Independent Studies or Reports Reports prepared independently of the small business may be beneficial in mitigating any weaknesses identified in the credit analysis. Examples of these independent studies/reports may include: i. Feasibility studies; ii. Hospitality facility assessment reports; iii. Energy audits; and iv. Franchise (as defined by FTC) assessment reports.
SOP 50 10 8 C.Ch1.E.1.g
g. Feasibility Studies SBA has the regulatory authority to request a feasibility study when it is needed to further understand the small business type and market conditions at the project location. The SLPC Director will request a feasibility when appropriate. The following may cause SBA to request a feasibility study: i. Market saturation by industry type and location; ii. Unique market concept; iii. Highly specialized Project property; iv. Project size disproportionate to size of community it will serve; or v. Significant rapid growth of the Applicant and/or affiliate group with a corresponding increase in undisbursed and/or unseasoned debt.
SOP 50 10 8 C.Ch1.E.1.h
h. Ratio Analysis A ratio analysis of the Federal tax returns and interim financial statements including comments on any trends and a comparison with industry averages. The analysis must include a review of calculations (based on the pro-forma Balance Sheet and historical and projected Income Statements) for the following financial ratio benchmarks: i. Current Ratio; ii. Debt/Tangible Net Worth; iii. Debt Service Coverage; iv. Any other ratios that are relevant for the business/industry (e.g., inventory turnover, receivables turnover, and payables turnover, etc.) including discussion of the CDC’s comparison to industry trends.
SOP 50 10 8 C.Ch1.E.1.i
i. Owners or Manager’s Experience A discussion of the owners’ and managers’ relevant experience in the type of business, as well as their personal credit histories. A description and history of the business including: i. Nature of the business; ii. Length of time in business under current management; iii. Depth of management experience in the industry or a related industry;
SOP 50 10 8 C.Ch1.E.1.i.iv
iv. Brief description of the business’s management team including principal’s involvement in the daily onsite management of the business or how the daily operations will be managed if the principals are not there on a daily basis. j. Collateral Analysis The CDC must discuss the collateral and lien position. CDC must disclose any deed restrictions on the project property.
SOP 50 10 8 C.Ch1.E.1.k
k. Life Insurance Analysis The CDC must include a discussion of its analysis whether life insurance is required in accordance with Section A, Ch. 5 Para. C.5, Life Insurance. If life insurance is required, include the calculation of the amount required. If the CDC determines the viability of the business is not tied to an individual, include an explanation of this determination.
SOP 50 10 8 C.Ch1.E.1.l
l. Credit Reports CDCs are required to obtain and review credit reports for the small business concern applying for the loan, all owners who are guarantors and affiliates who are guarantors. The analysis must include a discussion of the Applicant’s credit history, including a review of business credit reports and any experience the CDC may have with the Applicant. Credit reports are not required on non-guarantor affiliates.
SOP 50 10 8 C.Ch1.E.1.m
m. Current on Taxes The CDC must verify the Applicant is current on all Federal, State, and local taxes, including but not limited to income taxes, payroll taxes, real estate taxes and sales taxes. For more information, see Section A, Ch. 1, Para. E, Types of Ineligible Businesses.
SOP 50 10 8 C.Ch1.E.1.n
n. No Prior Loss to the Government or Delinquent Federal Debt SBA may not approve a 504 loan to an Applicant who has a Prior Loss to the government or Delinquent Federal Debt. For more information, see Section A, Ch. 1, Para. E, Types of Ineligible Businesses.
SOP 50 10 8 C.Ch1.E.1.o
o. Payment Delinquencies, Liens and Bankruptcies The CDC’s credit memorandum must include discussion on payment delinquencies, judgements, liens, bankruptcy filings, pending litigation, Federal or state tax filings or other relevant information from the credit reports.
SOP 50 10 8 C.Ch1.E.1.p
p. Affiliate Financial Statements The last 2 fiscal year-end financial statements and/or Federal income tax returns of affiliates (or 3 years, if the Industry Size Standard is used to qualify for SBA Size Standard) should be included in the CDC’s submission to SLPC. The CDC must also provide an analysis of these returns and statements including a complete debt schedule and discussion on the types and terms of the existing loans, debt, or credit facilities.
SOP 50 10 8 C.Ch1.E.1.q
q. Miscellaneous Matters that the CDC Must Address in the Credit Memorandum i. Applicant meets requirements for SBA financial assistance under SBA Loan Program Requirements. ii. The Interim Loan (if any): a) Does not cover the Applicant’s contribution; b) Source has the experience and qualifications to monitor properly all Project construction and program payments c) Source is not:
SOP 50 10 8 C.Ch1.E.1.q.i
i) From any SBA Program, directly or indirectly; or ii) The Applicant or an Associate of the Applicant; and d) Terms and conditions of the financing are acceptable. iii. The Third Party Loan: a) Is at least as much as the 504 Loan (net debenture proceeds); b) Has a term of at least 7 years for a 10-year debenture and at least 10 years for a 20-year or 25-year debenture; c) Interest rate is reasonable. iv. Any financing provided by the seller of the Project Property is subordinate to the 504 loan and may not be prepaid without SBA consent. v. None of the 504 loan proceeds are being used to provide or refinance funds used for payments, distributions, or loans to Associates of the Applicant.
SOP 50 10 8 C.Ch1.E.1.v.vi
vi. The Debenture Pricing. vii. If Applicant is an Eligible Passive Company: a) The EPC and OC both meet requirements for SBA financial assistance under SBA Loan Program Requirements; b) The EPC will use the 504 loan proceeds to acquire or lease, and/or improve or renovate real or personal property (including eligible refinancing) that it leases 100% to the OC; c) The lease between the EPC and the OC will: i) Be in writing; ii) Have a remaining term at least equal to the term of the loan (including options to renew exercisable solely by the OC); iii) Be subordinated to SBA’s lien on the property; and iv) Have rents that will be assigned as collateral for the loan. viii. The Gross Debenture amount does not exceed the amounts established by SBA Loan Program Requirements. ix. The Applicant’s use of proceeds complies with SBA Loan Program Requirements.
SOP 50 10 8 C.Ch1.E.1.x
x. Whether the loan is for the following special purpose or the Applicant is or does one of the following: Disabled Assistance Loan Program (DAL), Energy Conservation, Qualified Employee Trusts (ESOP), or Pollution Control Program. If so, PCLP CDCs may not approve the loan under their delegated PCLP authority. 2. Collateral and Appraisals Note: Environmental Policies and Procedures are located in Section A, Ch. 5, Para. E.
SOP 50 10 8 C.Ch1.E.2.a
a. Collateral i. SBA’s 504 Collateral Policy 13 CFR §120.934 When assessing the adequacy of collateral, the CDC must consider the impact that covenants and other restrictions recorded against the collateral may have on its value and marketability. The CDC must document this analysis in the file. Examples of items to review include: a) Deed restrictions, covenants, easement provisions, reversionary interests, subordinations, leases and options and other provisions that restrict the use of the property for the benefit of a third party (note: certain deed restrictions pertaining to the use of the property, which are intended to protect the health and safety of occupants, may be acceptable, e.g., deed restrictions based upon environmental concerns including restrictions on residential use, use as a day care center for children or seniors, use as a school, or use as a hospital); and b) Engineering Controls that require the small business concern or subsequent owners to install costly devices or structures such as extraction wells or subsurface barrier walls prior to constructing a building, remodeling, or otherwise improving the property. c) Environmental Indemnification provisions that run with the land are not eligible and must be removed or waived as to the Federal Government. CDC should review all other Non Environmental indemnification provisions as to their impact as to the value of the collateral and send the write up and a copy of the indemnification to [email protected] for clearance. SBA usually takes a second lien position on Project Property but may have a shared lien (pari passu) with the Third Party Lender. ii. Adequacy of Collateral: a) SBA’s second lien position will generally be considered adequate. SBA may consider other factors in determining the adequacy of SBA’s collateral including but not limited to the following: i) Strong, consistent cash flow that is sufficient to cover the debt; ii) Demonstrated, proven management; iii) The Applicant has been in operation for more than 2 years; and iv) The proposed Project is a logical extension of the applicant’s current operations. b) Because leasehold improvements provide minimal collateral value, the CDC must consider requiring additional collateral. c) Do not encumber assets or require additional contributions that the Borrower needs to sustain ongoing operations. Taking additional collateral with minimal liquidation value only serves to limit the Borrower’s ability to obtain additional short-term financing while offering little or no additional protection to SBA. d) If the loan is not fully collateralized by business assets, available personal assets must be pledged to secure the guaranty. See Section A, Ch. 5, Para. A, Guaranties, for more information. e) Lien position on real estate is generally evidenced by a title insurance policy. If the title insurance policy contains a clause requiring arbitration or a clause allowing either party to demand arbitration in the case of a dispute, an endorsement to the policy must be obtained deleting that condition. If the policy requires that both parties agree to arbitration, no endorsement is necessary. iii. Third Party Loan: a) The Third Party Lender usually has a 1st lien on the Project Property, and SBA cannot guarantee these loans. (13 CFR § 120.920) b) When the Third Party Lender is the property seller, the Third Party Loan must be subordinate to the 504 loan except under the following circumstances (13 CFR § 120.923): i) The Borrower assumes an existing note as part of the total financing; ii) The FDIC has carry-back financing; or iii) The property is classified as “Other Real Estate Owned” (OREO), by a national bank, a State-chartered, or other federally-regulated lender and the property is of sufficient value to support the 504 loan. For more information on eligibility of OREO property, see Section A, Ch. 3, Para. A.1.g. c) SBA’s lien position must not be subordinate to loans made from the proceeds of a tax-exempt obligation. iv. Mixed Use Collateral: When one 504 debenture finances both real estate and significant shorter term assets, such as machinery and equipment and furniture and fixtures, the CDC should consider the following: a) Taking, along with the Third Party Lender, lien positions based upon proportional shares in the financing of the Project; b) Taking a 1st lien position on the shorter term assets. SBA requires at least a 2nd lien position unless there is a lien from an existing 504 loan on the assets; c) Requiring additional equity or collateral; or d) Removing the shorter term assets from the Project and have them financed by another source.
SOP 50 10 8 C.Ch1.E.2.b
b. Appraisals 13 CFR § 120.160(b) i. Commercial Real Estate: a) Appraisals and Evaluations: i) SBA requires a real estate appraisal if the estimated value of the Project Property is greater than $500,000. ii) If the estimated value of the Project Property is $500,000 or less: (a) The CDC must obtain an appraisal under the following circumstances: Equity in land owned for 2 years or more is being contributed as part of Borrower’s contribution; The real estate is Third Party Lender’s OREO property (see Section A, Ch. 3, Para. A.1.g., for more information); If the loan finances a transaction involving parties with a close relationship (for example, transactions between existing owners or family members); The seller of the property is carrying back a loan that is part of the Borrower’s contribution; When the project includes a change of ownership; or If SBA or the CDC otherwise concludes that an appraisal is necessary to appropriately evaluate creditworthiness. (b) If an appraisal is not required under the preceding paragraphs, the CDC must obtain an appropriate evaluation of the Project Property being acquired with the loan proceeds that is consistent with safe and sound banking practices. Evaluations are not required to be performed in accordance with USPAP or by a State licensed or certified appraiser but should be consistent with the Interagency Guidance Appraisal and Evaluation Guidelines and the Interagency Advisory on the Use of Evaluations in Real Estate-Related Financial Transactions, issued by the Federal Banking Regulators. b) The appraiser must be:
SOP 50 10 8 C.Ch1.E.2.b.i
i) Independent and have no appearance of a conflict of interest (such as a direct or indirect financial or other interest in the property or transaction, independent of the loan production function, and not involved in the approval of the transaction); and ii) Either State-licensed or State-certified with the following exception: when the Project Property’s estimated value is over $1,000,000, the appraiser must be State-certified. c) The “Appraisal Report” must be prepared in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP) and dated no more than twelve months prior to the date of application. d) In order for the appraiser to identify the scope of work appropriately, the appraisal must identify SBA as the client or an intended user of the appraisal, as those terms are defined in the Uniform Standards of Professional Appraisal Practice (USPAP). The CDC may also be identified as the client or an intended user. It is acceptable to SBA if the appraisal identifies the Third Party Lender as the client and SBA as intended user. The CDC may not use an appraisal prepared for the applicant. The cost may be passed on to the Borrower. e) If the loan will be used to finance new construction or the substantial renovation of an existing building, the appraisal must estimate what the market value will be at completion of construction. (“Substantial” means rehabilitation expenses of more than one-third of the purchase price or fair market value at the time of the application.) After construction is completed, CDC must obtain a statement from the appraiser, general contractor, project architect, or construction management firm that the building was built with only minor deviations (if any) from the plans and specifications upon which the original estimate of value was based. If the CDC cannot obtain such a statement, then the CDC cannot close the loan without the Sacramento Loan Processing Center’s (SLPC) prior written permission. f) If the loan will be used to acquire an existing building that does not require construction, the appraiser should estimate market value on an as-is basis. If the appraiser estimates the value other than on an as-is basis, the narrative must include an explanation of why the as-is basis was not used. g) If the appraisal engagement letter asks the appraiser for a business enterprise or going concern value, the appraiser must allocate separate values to the individual components of the transaction including land, building, equipment, and business (including intangible assets). h) When the collateral is a Special Purpose Property, the appraiser must be experienced in the particular industry. i) An appraisal must be submitted and approved by the SLPC (except on Delegated loans) prior to closing. If the appraisal comes in at less than 90% of the estimated value, the debenture must be reduced or, if available, the CDC must secure additional collateral or additional investment from the Borrower and/or guarantors that will be added to the required Borrower’s Contribution and will be sufficient to address the gap in value. If additional collateral or additional investment is not available, but the applicant demonstrates strong, consistent cash flow sufficient to support the debt, then the SLPC can approve the appraisal and the CDC may close the loan. j) An appraisal must be submitted to the SLPC with the application under the following circumstances:
SOP 50 10 8 C.Ch1.E.2.b.i
i) Equity in land owned for 2 years or more is being contributed as part of Borrower’s contribution; ii) The real estate is Third Party Lender’s OREO; or iii) The Project will finance a transaction involving parties with a close relationship (for example, transactions between existing owners or family members). iv) The seller of the property is carrying back a loan that is part of the Borrower’s contribution. v) For non-arm's length change of ownership projects, the property must appraise for 100% of the estimated value. The purchase price is limited to the lesser of the As-Is appraised value or the purchase price of 504 eligible fixed assets. ii. Equipment Appraisal: SBA requires that an equipment appraisal be obtained when used equipment is part of the Project and is either being purchased from someone other than an equipment dealer or being refinanced. The equipment appraisal needs to be a written document from a person that is qualified to provide a valuation, is independent of the transaction, and has performed an on-site inspection of the equipment. The appraisal must be dated no more than twelve months prior to the date of the application. iii. Non-commercial real estate or real estate securing a personal guaranty: SBA has no specific appraisal requirements for non-commercial real estate (such as a residence) or real estate (commercial or non-commercial) taken as collateral to secure a personal guaranty. F. SUBMISSION OF LOAN APPLICATION
Operationalizing SBA SOP 50 10 8, C.Ch1.E — CREDIT STANDARDS
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