When an SBA Affiliate is also a Guarantor or Co-Borrower
Affiliation Based on Common Ownership/Control
Affiliation based on common ownership/control exists when a concern, individual or entity has control of our borrower AND control of any other businesses. Control can exist if there is a controlling ownership percentage; for example our borrower owns 100% of the business that is applying for a SBA loan and also owns 70% of an unrelated business.
Control can also exist through entity documents that define who has the rights over the business and negative controls which means that if 100% of votes are required for the business to take action on certain items that could impact the business then even small percentage owners have control because they have the power to stop action.
Affiliation based on Management Agreements
Affiliation based on management agreements can exist when the business owner has an agreement with an outside management company to manage the day to day operations of the business and basically becomes a passive investor at that point.
In order for a management agreement to not create affiliation the business owner needs to maintain control and oversight of certain parts of the business operation such as key staff if not all staff and bank accounts and major decisions for the business.
When an Affiliate is Required to be Either a Co-Borrower or Guarantor
Below is an example of where three businesses with somewhat common ownership would be required to be either co-borrowers or guarantors on a SBA loan. This is a real situation where affiliation exists as well as the requirement for these businesses to guarantee the SBA loan.
- Business 1 is an agricultural operation farming vegetables (borrower); business 2 owns the water rights to the ag land and business 3 is a distributor of the vegetables grown on the property. All three businesses are owned by the same family members more or less. Because all three are key to the success of the borrower they would be affiliates based on the size standard test AND would also be required to guarantee the loan.