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Understanding SBA Affiliation Rules: Unpacking the Intricacies for Small Business Lending

Are you a lender, a small business owner, or simply interested in learning about the intricacies of SBA (Small Business Administration) lending? If yes, then understanding the concept of affiliation and its importance in SBA lending is crucial. In this blog post, we'll delve into the world of SBA affiliation rules and examine how they influence SBA loan eligibility.

The Importance of Affiliation

First things first, why does affiliation matter? The answer lies in the eligibility requirements under SBA's Standard Operating Procedures (SOP). When establishing a business entity or a small business concern's eligibility for SBA lending, the entity must meet certain criteria set out by the Small Business Act. One such criterion is that the entity should be independently owned and operated, and not dominant in its field of operations. This is where affiliation comes into play.

To determine the size and eligibility of a business applicant, the SBA includes the business's affiliates. However, it's important to note that this isn't a change to guarantor guidance. A bank would still be allowed and expected to follow its internal policies for its non-government guaranteed portfolio.

Defining Affiliation

So, what exactly is an affiliate? An affiliation exists when the business applicant owns more than 50% of another business or if another business owns more than 50% of the business applicant. Let's clarify this with an example. Suppose our business applicant owns 75% of one entity and 40% of another. Since 75% is greater than 50%, an affiliation would exist between those two entities. However, for the entity in which the applicant only owns 40%, no affiliation exists.

The Complexity of Affiliation Rules

The rules of affiliation may seem straightforward but become more complex when you consider different scenarios. For example, a business entity owning more than 50% of the applicant can create an affiliation with another entity. However, for an affiliation to exist, the ownership has to be more than 50% of the other entity and that entity must operate in the same three-digit NAICS code sub-sector as our business applicant.

Affiliation When No Entity Owns More Than 50%

The rules slightly shift when no individual or entity owns more than 50% of the applicant. In such cases, you consider every owner of 20% or more and ask the same questions as before. For instance, suppose a food truck business (with a NAICS code 722) is owned by four owners, none of whom owns more than 50% of the business. The first three owners don't own any other business enterprises, so no affiliation occurs. However, if the fourth owner owns more than 50% of other entities in the same NAICS code, an affiliation could exist.

Beyond Direct Ownership

When determining ownership, the SBA considers interests beyond just direct ownership. This includes the ownership interests of spouses, minor children, stock options, convertible securities, agreements to merge, and pro rata ownership.

For example, if a person has direct ownership in an entity but also owns an entity that has a direct ownership, those effective ownerships would be combined in the overall calculation. The ownership interest of spouses and minor children are also combined to determine the overall ownership.

Understanding SBA affiliation rules is essential for anyone involved in SBA lending. By grasping these complex rules, you empower your lending decisions and ensure the eligibility of your SBA loans.

Still have questions about SBA affiliation? Feel free to reach out to us, and stay tuned for more insightful discussions on SBA lending.