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It is very common for a borrower’s financing needs to exceed the amounts, or uses of proceeds, allowed by the SBA. In such circumstances, a lender may choose to provide multiple loans to the borrower, often combining an SBA 7(a) loan with a conventional commercial loan. While there are no general prohibitions against the use of multiple loans from the same lender to a borrower, SBA lenders must avoid any action that establishes a “preference” in favor of the SBA lender. Additionally, a lender must be particularly careful to avoid establishing a preference when using its delegated authority.
13 CFR 120.10 defines “preference” as any arrangement giving a Lender or a CDC a preferred position compared to SBA relating to the making, servicing, or liquidation of a business loan with respect to such things as repayment, collateral, guarantees, control, maintenance of a compensating balance, purchase of a Certificate of deposit or acceptance of a separate or companion loan, without SBA's consent.
Further, SOP 50 10 8 and SOP 50 56 1 state that a Lender must not have a 7(a) loan in a “piggyback” structure.
- Piggyback financing occurs when one or more lenders provide more than one loan to a single Borrower at or about the same time, financing the same or similar purpose, and where the SBA-guaranteed loan is secured with a junior lien position or no lien position on the collateral securing the non-guaranteed loan(s). SBA considers “at or about the same time” to mean loans approved within 90 days of each other.
- SBA does not consider a scenario where both the SBA-guaranteed loan and the non-SBA guaranteed loan are for working capital and the non-SBA guaranteed loan is secured only by working/trading assets to be a piggyback structure.
- SBA does not consider a shared lien position with the lender (pari passu) to be a piggyback structure when the maturity of the non-SBA guaranteed loan is not shorter than the maturity of the SBA-guaranteed loan.
Pari passu means that an SBA loan and a conventional loan are on equal footing and share the same lien position on the collateral pledged to both loans. When utilizing pari passu liens, it is important for the lender to ensure that:
- Both loans are subject to cross-default provisions;
- Any proceeds derived from the liquidation of the collateral is allocated to each of the loans pro-rata based on the outstanding balance of each loan upon the occurrence of the uncured event of default; and
- The pari passu loans are not cross-collateralized with any other loans.
A lender providing both the SBA and conventional loans to the borrower should include a pari passu memo in each loan file to ensure that future servicing and/or liquidation actions follow the pari passu requirements. If two separate lenders agree to a pari passu lending structure, it is advisable for the lenders to enter into an Intercreditor Agreement to reflect the shared lien position, as well as the agreed upon process and procedure in the event of a collateral liquidation.
If your lending institution has questions about pari passu lien positions, or other SBA lending matters, please contact us at SBAQuestions@JellumLaw.com.
This article is provided for general information and educational purposes only. It does not solicit, establish, or continue an attorney-client relationship. The contents should not be construed as legal advice or opinion. If the organization would like formal legal advice, our professional liability insurer (as well as the applicable attorney ethical rules) requires that we establish a formal attorney-client relationship. If you are interested in learning more about working with Jellum Law, please contact us at SBAQuestions@JellumLaw.com.
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