SBA Loans and Transfers of Ownership
The Coronavirus Aid, Relief, and Economic Security Act (the “Cares Act”) established both the Paycheck Protection Program (the “PPP”) to be administered by the US Small Business administration (the “SBA”) and modified the SBA’s Economic Injury Disaster Loan (the “EIDL”) program.
Change of Business Structure
From the time that a small business owner may have received either the PPP or EIDL, the business itself may have experienced or may be planning a change of ownership.
What is a change of ownership? Changes in the business include but are not limited to the following:
- Acquiring a new business partner.
- Selling your interest in the company, especially if you are considering retiring.
- A business merger
- A corporate reorganization
When you are contemplating a change in your business, you must review the terms of your PPP or EIDL to determine if the change requires consent or approval of either or both of the PPP lender and SBA.
What is required of an EIDL borrower?
The EIDL loan documents clearly require the SBA’s approval of a strategic transaction or change of business structure. Typically, the EIDL Promissory Note states that the borrower is in default if it “reorganizes, merges, consolidates or otherwise changes ownership or business structure without SBA’s written consent.” The SBA requires collateral to secure EIDLS over $25,000.00. This collateral extends to real estate or the borrower’s tangible and intangible personal property, as the Security Agreement states that the borrower will “not sell, lease, license or otherwise transfer (including by granting security interests, liens, or other encumbrances in) all or part of the Collateral or Borrower’s Interest in the Collateral without, again the SBA approval.
If there is a transfer of ownership, the addition or deletion of a guarantor to the loan requires approval. While the Cares Act EIDLs do not require a personal guaranty for loans under $200,000.00, the SBA still nevertheless requires its approval of the transfer.
What is required of a PPP borrower?
SBA approval is required if there is a change of ownership of a Borrower in the first 12 months of final disbursement of the loan. The assumption of a PPP loan with the release of the original borrower also requires SBA approval. If, however, the loan is forgiven, especially under the recent passage of the Consolidated Appropriations Act, 2021, then the loan is effectively paid off, and then approval from the SBA may not be not necessary.
Some situations may require the lender itself that provided the PPP funding to notify the SBA of any change of the business structure of the borrower. Such situations may include a change to the Employer Identification Number or social security number of the obligor.
It is critical to note that one must, regardless of SBA approval, be familiar with the terms of the lender’s documents as the lender may require consent for situations that arise pursuant to the lender documents. One must review the PPP note, loan agreement, and other documents to determine if the lender’s consent or waiver of default is required.
What happens if I do not notify or obtain approval for changes in my business structure?
Before you change the business structure of your company, keep in mind that approval and/or notification of any such changes are critical. If the necessary approval, for instance, is not obtained, the loan itself may become fully due. There are specific clauses within your loan documents which should be reviewed in order to make sure that you remain compliant. Should you not obtain the requisite consent or provide notice, you may be in default of the terms of your loan.
Should you have any questions regarding your particular loan, especially if you are considering a change in your business structure, our team at Oppenheim Law is able to assist you. Call us at 954-384-6114 or e-mail us at firstname.lastname@example.org