SBA SOP 50 10 8, B.Ch3.i.4 — Credit Standards for International Trade
Verbatim text of SBA SOP 50 10 8 section B.Ch3.i.4 (Credit Standards for International Trade), effective 2025-06-01. 17 provision(s) quoted from the SOP PDF. SBA's own document page serves superseded editions, and the SOP is further amended by policy notices — read this with the notices that touch it.
Verbatim regulatory text
Verbatim provisions from SBA SOP 50 10 8, B.Ch3.i.4 — Credit Standards for International Trade — each quote is a verified substring of the regulator-published source snapshot, not retyped. Quoted for reference; this is not legal advice. The operational layer (P&P updates, prompts) lives in the regulation update kits.
SOP 50 10 8 B.Ch3.i.4
4. Credit Standards for International Trade The policies that make up SBA’s credit standards begin with the requirements outlined in 13 CFR §§ 120.101 and 120.150. This section provides procedural guidance as to what the Lender should or must consider when analyzing any request for financial assistance that will be guaranteed by SBA. A Lender must analyze each application in a commercially reasonable manner, consistent with prudent lending standards. The cash flow of the Applicant is the primary source of repayment, not any expected recovery from the liquidation of collateral. Thus, if the Lender’s financial analysis demonstrates that the Applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available or outside sources of repayment.
SOP 50 10 8 B.Ch3.i.4.a
a. Processing Methods Once submitted to SBA for non-delegated processing, an application withdrawn by a Lender, screened-out, or declined by SBA may not be approved by any Lender under its PLP authority. E-Tran will not permit the submission of such an application under any Lender’s PLP authority for a period of 12 months from the date of the withdrawal, screen-out, or decline of the application.
SOP 50 10 8 B.Ch3.i.4.i
i. Non-delegated – When a Lender submits an IT loan guaranty request under the non-delegated processing method, the Lender submits the application and supporting documents to SBA. SBA will make the final determination as to the eligibility and creditworthiness of the Applicant, including approving the uses of proceeds, the adequacy of the collateral being pledged, the structure of the loan and any equity injection to be required from the Applicant.
SOP 50 10 8 B.Ch3.i.4.i.ii
ii. Delegated – When a Lender submits an IT loan guaranty request under the Lender’s PLP authority, the Agency does not review the Lender’s analysis of the credit or structure of the loan prior to issuing a loan number. The Lender must analyze credit worthiness in accordance with SBA Loan Program Requirements and properly document its file. The PLP Lender’s analysis is subject to SBA’s review and determination of adequacy, when the Lender requests SBA to purchase its guaranty or when SBA is conducting lender oversight activities.
SOP 50 10 8 B.Ch3.i.4.b
b. Underwriting i. Lender’s Credit Analysis: The Lender’s credit memorandum and analysis must address the Applicant’s ability and likelihood to repay the loan from the cash flow of the business and past performance by documenting the following: a) A description and history of the business, including:
SOP 50 10 8 B.Ch3.i.4.b.i
i) Nature of the business, including a description as to how the Applicant meets the specific Loan Program Requirements for an International Trade loan in Paragraph C.1. above; ii) Length of time in business under current management; iii) Depth of management experience in the industry or a related industry; iv) Brief description of the business’s management team including principal’s involvement in the daily onsite management of the business or how the daily operations will be managed if the principals are not there on a daily basis. b) Financial analysis of repayment ability: i) For existing businesses based on the three most recent years of historical financial information (tax returns or balance sheet with debt schedule and income statement) plus an interim financial statement. (13 CFR § 120.191) ii) For start-ups, new businesses, changes of ownership, and other applications based on projections, include detailed projections, including the supporting assumptions that reflect a debt service coverage equal to or greater than 1.15 within 2 years from loan funding or, for construction projects, within 2 years from the end of construction. iii) The financial analysis for all Applicants must address the following as applicable: (a) Historical cash flow for existing businesses that demonstrates total debt service coverage after the SBA loan; if the historical cash flow from the most recent full year and the interim financial statements do not show sufficient debt service coverage, Lender must obtain from the Applicant and analyze 2 years of detailed projections including the supporting assumptions justifying relying on projections instead of historical performance; (b) Calculation of operating cash flow (OCF) defined as earnings before interest, taxes, depreciation, and amortization (EBITDA); (c) Justification for additions and subtractions to cash flow such as the following: Unfunded capital expenditures; Non-recurring income; Expenses and distributions; Distributions for S-Corp taxes; Rent payments; Owner’s Draw; and/or Global cash flow analysis that includes assessment of impact on cash flow to/from any affiliate business. (d) The effect any affiliates may have on the ultimate repayment ability of the Applicant. c) Debt Service (DS) is defined as the future required principal and interest payments on all business debt inclusive of new SBA loan proceeds. The Applicant’s debt service coverage ratio (OCF/DS) must be equal to or greater than 1.15 on a historical and/or projected cash flow basis and 1:1 on a global basis. To perform a complete analysis of debt service, it is important for a Lender to obtain a current debt schedule prepared by the Applicant, including any shareholder debt. d) For cash flow projections, the Lender must calculate the debt service coverage and provide the assumptions supporting the projected cash flow coverage, including as applicable:
SOP 50 10 8 B.Ch3.i.4.b.i
i) Justification for revenue growth, i.e., new product lines, sales channels, and new production facilities; ii) Justification for any reduction in expenses; and iii) A comparison to current industry trends. e) Spread of pro-forma Business Balance Sheet (current business balance sheet adjusted for all changes in assets and liabilities as a result of the SBA loan, other debt, any required equity injection and use of loan proceeds); f) Ratio calculations (based on the pro-forma Balance Sheet and historical and projected Income Statements) for the following financial ratio benchmarks: Current Ratio, Debt/Tangible Net Worth, Debt Service Coverage, and any other ratios the Lender considers significant for the business/ industry (e.g., inventory turnover, receivables turnover, and payables turnover, etc.) including discussion of Lender’s comparison to industry trends; g) Analysis of working capital adequacy, at a minimum over the next 12 months; h) Assessment of collateral adequacy in accordance with paragraph 4.c. below; i) Insurance Requirements, including: i) Life Insurance–- on whom and how much. ii) Business hazard & liability insurances. j) Lender must document the refinancing of any debts as part of the loan request, in accordance with the written analysis required in the debt refinancing requirements above. In addition, Lender must include a written explanation for any late payments over the past 12 months. k) Lender’s rationale for recommending approval, including a discussion and analysis of the following: i) The factors demonstrating the Applicant does not have credit available elsewhere on reasonable commercial terms from non-Federal, non- State, non-local government sources. ii) When 50 percent or more of the loan proceeds will be used for working capital, Lender must explain in its credit memorandum why this level of working capital is necessary and appropriate for the subject business; iii) Competition; iv) Seller financing; v) Stand-by agreements; vi) 90+ day delinquencies; vii) Trade disputes and/or; viii) Federal, State, or local citations which would preclude the Applicant from normal business operations; ix) For a change of ownership, discussion/analysis of the business valuation used to support the purchase price (see Paragraph 4.d., Real Estate Appraisal and Business Valuation Requirements below);
SOP 50 10 8 B.Ch3.i.4.b.x
x) Discussion of any liens, judgments, bankruptcy filings or pending litigation including divorce proceedings; and l) If the application involves a franchise (as defined by FTC), the Lender must review any credit information provided, such as the number of failed franchisees and cash flow projections provided by the franchisor). Lender must review any management agreement (unless the management agreement is part of the franchise disclosure documents for a brand listed on the Franchise Directory) to determine if it results in an ineligible passive company; ii. Equity requirements (13 CFR § 120.150): For all loans, depending on whether the loan is processed on a non-delegated or PLP basis, the Lender or SBA must determine that there is sufficient invested equity. To do this, the Lender (for PLP loans) or SBA (for non- delegated loans) must determine if the equity position, any required equity contribution, and the pro forma debt-to-worth are acceptable based on the factors related to the type of business, experience of management and the level of competition in the market area. The Lender must include a detailed discussion of the equity position (net worth) and any required equity injection. (See Ch. 5, Para. D., Loan Closing and Disbursement, of this Section for requirements concerning documenting and verifying equity injection.) a) Start-Up Businesses. SBA considers a business to be a “start-up” for the purpose of determining equity injection requirements if it has been in operation (i.e., generating revenue from intended operations) for 1 year or less. SBA considers an equity injection (Applicant contribution) of at least 10 percent of the total project costs (all costs required to become operational, regardless of the source of funds) to be necessary for a Start-Up Business to operate on a sound financial basis. All 7(a) loans made to a Start-Up Business require a 10% equity injection based on the project cost; however, loans approved more than 90 days apart from each other are considered to be separate projects. b) Changes of Ownership Resulting in a new owner (complete change of ownership): At a minimum, SBA requires an equity injection of at least 10 percent of the total project costs, (all costs required to complete the change of ownership, regardless of the source of funds) for such transactions. c) The following may be considered as equity injection:
SOP 50 10 8 B.Ch3.i.4.b.i
i) Standby Agreements - only debt that is on full standby (no payments of principal or interest for the term of the 7(a) loan) may be considered as equity for SBA’s purposes. Lender must use SBA Form 155 or its own equivalent Standby Agreement form, and a copy of the note must be attached to the standby agreement. The standby debt may accrue interest and may be added to the standby debt and amortized after the 7(a) loan is paid in full. Standby Creditor must subordinate any lien rights in collateral securing the loan to Lender’s rights in the collateral and take no action against Borrower or any collateral securing the Standby Debt without Lender’s consent. ii) Cash that is not borrowed, whether on the business’s balance sheet or from other sources. iii) Cash that comes from a personal loan where repayment can be demonstrated to come from a source other than the cash flow of the business (the salary paid to the owner by the business does not qualify). iv) Grants that do not have repayment or clawback provisions during the life of the 7(a) loan.
SOP 50 10 8 B.Ch3.i.4.b.v
v) Assets other than cash – An appraisal or other valuation by an independent third party is required if the valuation of the fixed assets is greater than the Net Book Value. A valuation of the fixed assets provided as part of a business valuation will not meet these requirements. vi) Prepaid expenses that the Lender has verified by obtaining paid invoices, canceled checks, or bank statements. Lender must retain copies of the documentation in the loan file.
SOP 50 10 8 B.Ch3.i.4.c
c. Collateral See Section A, Ch. 5, Para. A. for guaranty requirements. i. Adequacy of Collateral: a) When assessing the adequacy of collateral, the Lender must consider the impact that covenants and other restrictions recorded against the collateral may have on its value and marketability. The Lender must document this analysis in the file. Examples of items to review include:
SOP 50 10 8 B.Ch3.i.4.c.i
i) Deed restrictions, covenants, easement provisions, reversionary interests, subordinations, leases and options, and other provisions that restrict the use of the property for the benefit of a third party (note: certain deed restrictions pertaining to the use of the property, which are intended to protect the health and safety of occupants, may be acceptable, e.g., deed restrictions based upon environmental concerns including restrictions on residential use, use as a day care center for children or seniors, use as a school, or use as a hospital); and ii) Engineering Controls that require the Applicant or subsequent owners to install costly devices or structures such as extraction wells or subsurface barrier walls prior to constructing a building, remodeling, or otherwise improving the property. Each IT loan must be secured either by a first lien position or first mortgage on the property or equipment financed by the IT loan or on other assets of the Borrower, except that an IT loan may be secured by a second lien position on the property or equipment financed by the IT loan or on other assets of the Borrower, if the SBA determines the second lien position provides adequate assurance of the payment of the IT loan. iii) Environmental Indemnification provisions that run with the land are not eligible and need to be removed or waived as to the Federal Government.
SOP 50 10 8 B.Ch3.i.4.c.ii
ii. Required Lien Position The Small Business Act, Section 7(a)(16)(B), requires that the Lender must take a first lien on the assets financed with IT loan proceeds or other assets of the Applicant. An IT loan can be secured by a second lien position on the property or equipment financed by the IT loan or on other assets of the Applicant, if the SBA determines that the second lien provides adequate assurance of repayment of the loan. For example, when the IT loan is to improve business real estate (such as financing an addition to an existing building) or to purchase equipment, and the collateral securing the IT loan is subject to a first lien securing an existing loan used to acquire the business real estate or equipment, the IT loan may be in a second lien position if: a) The loan in the first lien position was not made at or about the same time as the IT loan (“piggyback financing”). SBA considers “at or about the same time” to mean loans approved within 90 days of each other. b) The Lender’s analysis identifies how the risk of a second lien position on the IT loan is offset by other factors, such as other collateral has been taken to secure the IT loan that in liquidation would pay the IT loan in full or the business has been operating profitably and repaying its existing obligations in a timely manner and the Borrower’s cash flow is sufficient to repay all of the Borrower’s debt, including the IT loan. c) Clear justification must exist when the interest rate for the first lien loan is significantly higher than the IT loan and/or the maturity of the first lien loan is significantly shorter than the IT loan.
SOP 50 10 8 B.Ch3.i.4.c.iii
iii. IT loans may not be processed under a Lender’s PLP authority when the IT loan will not have a first lien on the assets being financed. iv. For all loans that are collateralized by commercial real estate, Lenders must comply with the requirements for real estate appraisals or evaluations below.
SOP 50 10 8 B.Ch3.i.4.d
d. Real Estate Appraisal and Business Valuation Requirements The regulation governing real estate appraisal is set forth at 13 CFR § 120.160(b). i. Commercial Real Estate: a) For all loans secured by commercial real estate, Lenders must obtain an appraisal by a State licensed or certified appraiser. Appraisals must be in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). Additionally, SBA requires that completed appraisals be dated within 12 months of the application for guaranty. For federally-regulated Lenders, no exemption is granted under the Interagency Guidance Appraisal and Evaluation Guidelines for Transactions Insured or Guaranteed by a U.S. Government Agency. b) The appraiser must be:
SOP 50 10 8 B.Ch3.i.4.d.i
i) Independent and have no appearance of a conflict of interest (such as a direct or indirect financial or other interest in the property or transaction, independent of the loan production function, and not involved in the approval of the transaction); and ii) Either State-licensed or State-certified, with the following exception: when the commercial property’s estimated value is over $1,000,000, the appraiser must be State-certified. c) In order for the appraiser to identify the scope of work appropriately, the appraisal must identify the Lender as the client and/or an intended user of the appraisal, as those terms are defined in USPAP, except that federally-regulated Lenders may follow their primary regulator’s FIRREA requirements to the extent they permit otherwise. The Lender may not use an appraisal prepared for the seller or the Applicant. The cost may be passed on to the Applicant. d) The appraisal must be an “Appraisal Report” prepared in compliance with USPAP. e) If the loan will be used to finance new construction or the substantial renovation of an existing building, the appraisal must estimate what the market value will be at completion of construction. (“Substantial” means rehabilitation expenses of more than one-third of the purchase price or fair market value at the time of the application.) After construction is completed, Lender must obtain a statement from the appraiser, general contractor, project architect, or construction management firm that the building was built with only minor deviations (if any) from the plans and specifications upon which the original estimate of value was based. If the Lender cannot obtain such a statement, then the Lender may not close the loan without SBA’s prior written permission. f) If the SBA-guaranteed loan was used to cover the construction period, the Lender must notify the appropriate SBA CLSC of any deviation(s) and work with the SBA CLSC to determine an appropriate course of action, including the securing of additional collateral. The Lender’s notification to SBA must provide a sufficient understanding of the reasons for the differences in values between the estimated and actual values as well as a recommendation as to a remedy to offset the difference in values such as additional equity or additional collateral. If additional collateral is being required, the Lender must identify both the fair market and liquidation values of the additional collateral. If the Lender is unable to obtain a statement that the building was built with only minor deviations (if any) from the plans and specifications upon which the original estimate of value was based, but is able to obtain a new appraisal demonstrating that the market value meets or exceeds the original estimate of value, then no additional action on the part of the Lender is necessary. g) If the loan will be used to acquire an existing building that does not require construction, the appraiser should estimate market value on an as-is basis. If the appraiser estimates the value other than on an as-is basis, the narrative must include an explanation of why the as-is basis was not used. h) When valuing the collateral, the Lender must not include the contributory value of any rental income or the value of any intangible assets contained in the appraisal. i) An appraisal may be submitted as part of the loan application to assist with the underwriting or as part of the loan closing. In no case may the Lender rely on an appraisal that was prepared more than 12 months prior to the date of the application. j) If the Lender is going to require the appraisal at closing, the loan application must include an estimate of the value of the real estate and the estimate must be identified in the Lender’s credit memorandum with the requirement for an appraisal that supports the estimated value at time of closing. k) If at time of closing the appraised value:
SOP 50 10 8 B.Ch3.i.4.d.i
i) Is 90% or more of the estimated value, the Lender may close the loan but must include a written explanation as to why the appraisal is less than the estimated value in the loan file; or ii) Is less than 90% of estimated value, the Lender may not close the loan without SBA’s prior written permission (see exception below for PLP Lenders). The Lender’s justification to SBA must provide a sufficient understanding of the reasons for the differences in values between the estimated and actual values as well as a recommendation as to a remedy to offset the difference in values such as additional equity or additional collateral. If additional collateral is being required, the Lender must identify both the fair market and liquidation values of the additional collateral. iii) Exception for PLP Lenders: PLP Lenders are permitted to close a loan when the appraisal is less than 90% of the estimated value but the Lender must include a written justification as part of its file that may be reviewed by SBA at time of guaranty purchase or when SBA is reviewing the Lender. The justification must include a thorough analysis by the Lender of the reasons for the appraisal being low and an explanation as to what steps the Lender took to offset the risk to SBA from the low appraisal such as additional equity or additional collateral. ii. Non-commercial real estate or real estate securing a personal guaranty: SBA has no specific appraisal requirements for non-commercial real estate (such as a residence) or real estate (commercial or non-commercial) taken as collateral to secure a personal guaranty. iii. Other Fixed Assets: If the valuation of fixed assets is greater than their Net Book Value, an independent appraisal by a qualified individual must be obtained by the Lender to support the higher valuation. The appraiser must be independent of the loan production function, not involved in the approval of the transaction, and must not have the appearance of a conflict of interest. A valuation of the fixed assets provided as part of a business valuation will not meet these requirements, except as part of a going concern appraisal. iv. Additional Appraisal Requirements for all Changes of Ownership: For businesses that have been transferred within 36 months prior to the date of the loan application and the loan amount is more than $500,000, SBA requires: a) An appraisal of the business real estate that meets the appraisal requirements above; and b) Either a review of the appraisal by another appraiser selected directly by the Lender or a site visit by a senior member of the Lender’s staff. The Lender must document the file and include the date of the visit and a description of the items reviewed on site. v. Business Valuation Requirements – Change of Ownership: a) Determining the value of a business (not including real estate which is separately valued through a real estate appraisal) is the key component to the analysis of any loan application for a change of ownership. An accurate business valuation is required because the change in ownership will result in new debt and potentially the creation of intangible assets. A business valuation assists the buyer in making a determination that the seller’s asking price is supported by an independent Qualified Source (see definition in Appendix 3). b) In order for the individual performing the business valuation to identify the scope of work appropriately, the business valuation must be requested by and prepared for the Lender. The scope of work should identify whether the transaction is an asset purchase or stock purchase and be specific enough for the individual performing the business valuation to know what is included in the sale (including any assumed debt). The business valuation must include the individual’s conclusion of value, the qualifications of the individual performing the business valuation and their signature certifying to the information contained in the business valuation. The Lender may not use a business valuation prepared for the Applicant or the seller. The cost of the business valuation may be passed on to the Applicant. i) Non-Special Purpose Properties: (a) If the amount being financed (including any 7(a), 504, seller, or other financing) minus the appraised value of real estate and/or equipment being financed is $250,000 or less, the Lender may perform its own valuation of the business being sold, unless the Lender’s internal policies and procedures require an independent business valuation from a Qualified Source. (b) If the amount being financed (including any 7(a), 504, seller, or other financing) minus the appraised value of real estate and/or equipment is greater than $250,000 or if there is a close relationship between the buyer and seller (for example, transactions between existing owners or family members), the Lender must obtain an independent business valuation from a Qualified Source. ii) Special Purpose Properties: (A “Special Purpose Property” is a limited-market property with a unique physical design, special construction materials, or a layout that restricts its utility to the specific use for which it was built.) (a) If the amount being financed (including any 7(a), 504, seller, or other financing) minus the appraised value of real estate and/or equipment being financed is $250,000 or less, the Lender may perform its own valuation of the business being sold, unless the Lender’s internal policies and procedures require an independent business valuation from a Qualified Source. (b) If the amount being financed (including any 7(a), 504, seller, or other financing) minus the appraised value of real estate and/or equipment being financed is over $250,000 or if there is a close relationship between the buyer and seller (for example, transactions between existing owners or family members) and the business operates from a Special Purpose Property, the Lender must obtain an independent appraisal performed by a Certified General Real Property Appraiser. The appraiser must be independent of the loan production function, not involved in the approval of the transaction, and must not have the appearance of a conflict of interest. (c) The appraisal must allocate separate values to the individual components of the transaction including land, building, equipment, and intangible assets. (d) The Certified General Real Property Appraiser must have completed no less than four going concern appraisals of equivalent special use property as the property being appraised, within the last 36 months, as identified in the qualifications portion of the Appraisal Report. (e) Each appraisal assignment under this section must be undertaken with a specific instruction for the Certified General Real Property Appraiser to conduct the appraisal in compliance with current USPAP guidelines. iii) If the application will be submitted to the LGPC, the business valuation must be submitted as part of the loan application. (See Paragraph 5 below.) iv) If the application will be submitted under delegated authority, the business valuation may be obtained and reviewed after the issuance of an SBA Loan Number and prior to closing. If the Lender is processing the application under delegated authority and requests the business valuation after issuance of an SBA Loan Number, the credit memorandum must include an estimate of the value of the business. The credit memorandum must be updated after receipt of the business valuation to include a comparison of the loan amount and the business valuation. v) Any amount(s) of the loan proceeds that will be used to facilitate a change of ownership may not exceed the business valuation. vi) Lender Verification of Business valuation Financial Data: Lender must obtain a copy of the financial information relied upon by the individual who performed the business valuation and verify that information against the seller’s IRS transcripts to ensure the accuracy of the information.
Operationalizing SBA SOP 50 10 8, B.Ch3.i.4 — Credit Standards for International Trade
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