| It is no secret that documenting equity injection for | | | | must next confirm that several requirements are met. |
| SBA loans can be a painstaking task. In the past, | | | | Most importantly, individual owners must pay for their |
| borrowers often utilized home equity lines of credit as | | | | stock in an amount that is commensurate with their |
| their source of injection. However, plummeting home | | | | ownership percentage. In other words, the price per |
| values and SBA rule restrictions implemented in the | | | | share paid by individuals must be equal to the price |
| SOP 50-10(5) have virtually eliminated this source. | | | | paid by the QRA for its shares, and the resulting |
| Accordingly, borrowers are increasingly providing | | | | ownership interests must be proportional to the price |
| equity injection in the form of qualified rollovers of their | | | | paid. Lenders should verify these amounts with the |
| existing 401(k), profit sharing plan or other qualified | | | | professional firm that orchestrates the QRA rollover |
| retirement account (collectively referred to herein as | | | | and confirm that the funds were deposited in the |
| QRAs). To document this form of equity injection, | | | | C-corporation's bank account. Secondly, if an |
| lenders must conduct a unique analysis. | | | | individual's spouse has any entitlement to the benefits |
| Lenders must first be able to identify a QRA rollover. In | | | | of the QRA, he or she must provide a full unlimited |
| a rollover scenario, the QRA purchases some | | | | guaranty. Lastly, an individual's guaranty must be |
| percentage of the borrowing entity's stock. If the QRA | | | | secured if the value of the business assets securing |
| owns at least 20% of the borrowing entity, pursuant to | | | | the loan is less than the amount of the loan. |
| SBA regulations, it must provide a guaranty. By | | | | The final piece of documentation lenders must obtain is |
| definition, QRAs cannot provide guarantees. Since | | | | an opinion letter from ERISA counsel containing the |
| lenders cannot obtain the guaranty of a QRA, the | | | | following: (1) a description of the type of retirement |
| previous SOP required lenders to apply to the SBA's | | | | account (the Plan) that owns at least 20% of the |
| Associate Administrator for Financial Assistance (AA | | | | business; (2) the specific cite under the IRC that |
| FA) for a guaranty waiver. Because an externally | | | | describes the type of Plan; (3) the specific cite under |
| imposed legal restriction (ERISA) prevents QRAs from | | | | IRC that delineates why the Plan cannot take on any |
| providing guaranties, the AA/FA was able to waive | | | | liabilities; and (4) a statement of how the Plan got to be |
| the SBA's guaranty requirement. When the AA/FA did | | | | or will be "qualified". If the Plan is already qualified, |
| grant a guaranty waiver, all principals and beneficiaries | | | | counsel must provide IRS documentation showing how |
| were required to pledge their personal and unlimited | | | | it achieved qualified status. If the Plan will be qualified in |
| guaranties. Under the SOP 50-10(5), lenders are no | | | | the future, ERISA counsel must provide (1) a statement |
| longer required to obtain a waiver from the SBA. | | | | of when application was made to the IRS for |
| Nevertheless, lenders still must obtain the same | | | | determination of "qualified" classification; (2) a |
| documentation as if they were submitting a waiver | | | | statement that in the counsel's opinion, the application |
| request, including securing the unlimited guaranty of all | | | | will comply with the IRC and ERISA regulations; and (3) |
| principals and QRA beneficiaries. | | | | a statement that upon final determination from IRS, the |
| There are three scenarios in which lenders are | | | | Plan trustee will provide the lender with a copy of the |
| prevented from documenting a guaranty waiver. First, | | | | approval. |
| a QRA cannot purchase the stock of an EPC. The | | | | The reasoning behind the prior SOP was not simply to |
| AA/FA did not possess the authority to waive | | | | assist lenders in documenting the absence of an |
| guarantees in these instances, and by extension, | | | | otherwise required guaranty, but also to insure that the |
| lenders do not have this authority. Next, a QRA cannot | | | | Plan had or would have obtained "qualified" status |
| own 100% of the borrowing entity's stock. ERISA rules | | | | from the IRS. A proper QRA rollover will not incur |
| state that neither a QRA nor its individual holder is | | | | early withdrawal penalties. However, if an unqualified |
| permitted to incur debt, which prevents the beneficiary | | | | retirement account were to purchase the shares of |
| principal from providing his or her guaranty. This | | | | the borrowing entity, it would incur hefty early |
| situation is ineligible because any beneficiary of a QRA | | | | withdrawal penalties. The IRS would likely assess |
| must provide his or her personal guaranty when the | | | | these penalties against the borrower within the first |
| QRA owns 20% or more of the borrowing entity. | | | | loan year and potentially cause a loan to default. |
| Finally, the borrowing entity cannot be an S-corporation. | | | | Because the QRA funds are a portion of the |
| The professionals who establish these QRA rollovers | | | | borrower's equity injection, this early default could |
| have stated that in order to be eligible, the entities must | | | | jeopardize the SBA guaranty. In conclusion, in order to |
| be C-corporations. Lenders can verify this information | | | | preserve the SBA guaranty and facilitate the success |
| with the professional firm that facilitates the rollover. | | | | of their borrowers, lenders must diligently document |
| Provided none of the ineligible scenarios exist, lenders | | | | QRA rollovers. |