Best Practices: Funding Equity Injection through a Corporate Affiliate

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FEATURED ARTICLE

By: Demetri A. Braynin, Esquire

Although funding equity injection through a borrower’s affiliated entity is not an uncommon practice, lenders must exercise care in these circumstances. On many occasions, such transfers of funds from the affiliate to a borrower are characterized as gifts. This is problematic as corporations do not “gift” monies to other corporations; corporations have a duty to act in the interests of their shareholders or members and must keep sufficient invested equity in the business to protect the business’s survival. Lenders may wish to ask how the borrower and its affiliate “account” for the “gift” on their tax records. Remember, if the affiliate ever requires cash in the future, it may not go back to the borrower as that money, the equity injection, must remain in the borrower’s business for not just the life of the SBA loan but “forever”. It is a gift. Would a real business ever do such a thing?

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IN THE SPOTLIGHT

Tim D'Lauro, Esquire

Tim is an attorney in Starfield & Smith’s Fort Washington office. His areas of practice include commercial lending, finance, real estate and corporate law. Representing financial institutions nationwide, including national banks, community banks, credit unions and non-bank lenders, he has extensive experience as closing counsel for various types of financial transactions. Tim is an approved closing attorney for certified development companies which facilitate the U.S. Small Business Administration 504 loan program. In such representation, he assists borrowers and third party lenders in understanding all the complexities in the requirements and funding process under the SBA 504 loan program. He also works closely with local SBA District Counsel to ensure the eligibility of the loan submissions for inclusion in the applicable monthly debenture fundings.

Admissions:

Pennsylvania
New Jersey

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