March 4, 2019

Small Business Administration Issues Guidance for Loans

Executive Director

On February 15, the Small Business Administration issued SOP 50 10 5(K), which will take effect on April 1, 2019.

The provisions allow SBA-backed loans to finance "any transaction costs associated with purchasing a controlling interest in the employer, but not costs associated with setting up the ESOP or cooperative" and mirror loans to create an ESOP. The guidance also specifies that "any seller who remains as an owner, regardless of percentage of ownership, must provide their guaranty." (The above is from Chapter 2, paragraph V.H.1-2.) The guidance also appears to deny the use of the expedited preferred lender program for employee ownership transitions, although the guidance only mentions loans for cooperatives, not for ESOPs. The implication is that the SBA will have to approve each loan on a case-by-case basis (see here).

The guidance was developed in response to the passage of the Main Street Employee Ownership Act. It achieves much but not all of the stated intent of the Act. For example, the Act intended to allow SBA-backed loans via the preferred lender program, but this intent does not appear to be met by the guidance.

The SBA Information Notice is here, and the full document is here.