SBA SOP 50 10 8.1, C.Ch1.E.1 — CDC Credit Memorandum
Verbatim text of SBA SOP 50 10 8.1 (with Technical Policy Updates) section C.Ch1.E.1 (CDC Credit Memorandum). Effective 2026-10-01 for applications received by SBA on or after that date; SOP 50 10 8 governs applications submitted through 2026-09-30. 1 provision(s) quoted from SBA's .docx.
See also
SBA lending corpus: SOP 50 10 and the active notices, with the expiry watcher.
Verbatim regulatory text
Verbatim provisions from SBA SOP 50 10 8.1, C.Ch1.E.1 — CDC Credit Memorandum — 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 8.1 C.Ch1.E.1
11 sections · 18,714 characters of verbatim text. Open a section to read it, or . Every section below is in the page source whether open or closed.
§1. CDC Credit Memorandum104 ch
1. CDC Credit Memorandum The CDC’s credit memorandum must address the following: a. Financial Reporting
iThe credit analysis must primarily focus on the highest level of…384 ch
i. The credit analysis must primarily focus on the highest level of financial statements available (Accountant Audited or Reviewed statements). Financial reporting is ordered by terms of thoroughness: (1) Audited Financial Statements, (2) Reviewed Financial Statements (Prepared to AICPA SSARS AR-C 90 standards), (3) CPA Compiled Financial Statements, and (4) Corporate Tax Returns.
iiIn situations where a higher level financial statement is…2,006 ch
ii. In situations where a higher level financial statement is available, the credit memorandum must also include a review of the corporate tax return for eligibility. b. TPL Underwriting 504 Projects include participation by the TPL to support funding to the Borrower. For any 504 project with total project costs of at least $5,000,000, SBA requires either the TPL’s credit memorandum or underwriting analysis to be submitted to SLPC to support the Agency’s underwriting and review of the transaction. The TPL’s credit memorandum or underwriting analysis may omit sections on additional products, services, or risk ratings. The CDC must indicate in the credit memorandum which of the following two options is being used to satisfy the requirement for delivering this information to the SBA: i. The CDC can obtain the TPL’s credit memorandum or underwriting analysis and include that analysis in the CDC credit memorandum when the loan is submitted to SLPC. No additional documentation, forms, or templates are required for the CDC to satisfy this requirement. ii. The TPL may submit the credit memorandum or underwriting analysis directly to SLPC. This can be accomplished by having the TPL submit the document to TPL.504@sba.gov or through electronic submission to TPL.504 box.com or any successive mechanism incorporated by SBA. c. Pro-Forma Balance Sheet Analysis i. A pro-forma balance sheet is created from a current business balance sheet that has been adjusted for all changes in assets and liabilities as a result of the Project, including the Third Party Loan, 504 loan, other new debt, any required equity injection, the use of loan proceeds, and the costs of getting the loan(s) (such as fees and closing costs). ii. The pro-forma balance sheet analysis must include a complete debt schedule and discussion on the types and terms of the existing loans, debt, or credit facilities. a) This includes a review of the credit facilities that will be in place following the 504 transaction closing.
iiiThe CDC must identify and discuss issues resulting from any…1,907 ch
iii. The CDC must identify and discuss issues resulting from any anomalies or variances on the balance sheet. d. Repayment Ability Analysis The analysis must address the following: i. If the Applicant is meeting SBA Size Standards under the: a) Alternative Size Standards – Include balance sheets, income statements, and Federal income tax returns for the previous 2 years, or the number of years the Applicant has generated revenue, whichever is less, b) Industry Size Standard–- Include balance sheets, income statements, and Federal income tax returns for the previous 3 years, or the number of years the Applicant has generated revenue, whichever is less. ii. For all 504 transactions, the repayment ability analysis must address debt service coverage. Debt Service Coverage (DSC) must be calculated on a historical basis using either the last fiscal year-end or an average of the last two fiscal year-end statements. The DSC ratio must be equal to or greater than 1.15:1. a) The DSC ratio is defined as the operating cash flow (OCF) defined as earnings before interest, taxes, depreciation, and amortization (EBITDA) divided by the combined debt service post transaction. CDCs must assume interest-only payments on fully drawn lines of credit for this calculation. i) Adjustments to cash flow: The CDC must make prudent adjustments to the cash flow. When adjusting cash flow, the CDC must prepare a Global Cash Flow and include a justification for additions and subtractions to cash flow, such as the following: (a) Rent payments; (b) Unfunded capital expenditures; (c) Non-recurring income; (d) Distributions; (e) Distributions for S-Corp taxes; and/or (f) Ownership compensation. iii. If the historical cash flow does not show sufficient debt service coverage after the effects of the SBA loan, the CDC must analyze projections in accordance with Subparagraph v., “Projection-based projects,” below.
ivBalance sheet and income statement dated within 120 days prior to…185 ch
iv. Balance sheet and income statement dated within 120 days prior to submission to SBA, including analysis of debt service coverage, aging of accounts receivable and accounts payable.
vProjection-based projects12,956 ch
v. Projection-based projects1,103 ch
v. Projection-based projects: If the historical cash flow does not show sufficient debt service coverage after the effects of the SBA loan, the CDC must analyze projections based on the following requirements: a) For projection-based projects, the analysis must include a minimum of 2 years of projections. b) The CDC must calculate the projected debt service coverage and provide the assumptions supporting the projected cash flow coverage. c) The analysis must support and justify the reasonableness and attainability of the assumptions, including as applicable: i) Justification for anticipated sales volume and/or revenue growth as a result of new product lines, sales channels, and new production facilities; ii) Justification for any reduction in expenses; and iii) Comparison to current industry trends. d) If the projections show repayment in Year 2 but not in Year 1, sufficient liquidity must be shown to cover the shortfall in Year 1. e) If applicable, the CDC must describe how the Applicant will make interest payments and pay for operations during construction. e. Borrower’s Contribution
iThe Borrower must contribute cash (or property acceptable to SBA…3,620 ch
i. The Borrower must contribute cash (or property acceptable to SBA obtained with the cash) or land (that is part of the Project Property) to the Project, or funds that were borrowed (subordinate to the Third Party loan and the 504 debenture, and, without SBA’s written approval, may not be repaid at a faster rate than the 504 loan), in an amount equal to the following, excluding administrative costs: a) All Borrowers must contribute at least 10%, which may be borrowed as long as it is subordinate to the Third Party Loan and the 504 debenture; b) New businesses must contribute at least 15%. The Debenture will finance no more than 35% of the Project and at least 50% of the Project financing will be from banks or other financial institutions, state or local government, or foundations or other non-profit institutions. c) Businesses with a Limited or Special Purpose Property: i) Must contribute at least 15%, in which case the Debenture will finance no more than 35% of the Project and at least 50% of the Project financing will be from banks or other financial institutions, state or local government, or foundations or other non-profit institutions. ii) Must contribute at least 20%, if the Project involves a new business 13 CFR § 120.910. iii) If the Borrower contributes at least 20% under this Paragraph c), the Debenture will finance no more than 30% of the Project and at least 50% of the Project financing will be from banks or other financial institutions, state or local government, or foundations or other non-profit institutions. iv) SBA allows Borrower’s equity in equipment to be counted toward Borrower Contribution in 504 debt refinancing with and without expansion if the debt was originally used to acquire the specific equipment. The Borrower’s equity in land and/or buildings and/or equipment previously acquired may be counted toward the Borrower’s contribution if the land and/or buildings and/or equipment are part of the Project. v) CDCs must address whether the Project Property is Limited or Special Purpose in their credit memorandum and include an explanation of their conclusion. vi) Below is a list that contains examples of properties that SBA considers to be a Limited or Special Purpose Property. This list is not intended to be all-inclusive and SBA may determine that other properties meet the Limited or Special Purpose Property definition. (a) Amusement parks; (b) Bowling alleys; (c) Car wash businesses; (d) Cemeteries; (e) Cold storage facilities where more than 50% of total square footage is equipped for refrigeration; (f) Dormitories; (g) Farms, including livestock and dairy facilities; (h) Funeral homes with crematoriums; (i) Gas stations; (j) Golf courses; (k) Hospitals, surgery centers, urgent care centers, and other health or medical facilities; (l) Hotels, motels, and other lodging facilities; (m) Marinas; (n) Mines; (o) Nursing homes, including assisted living facilities; (p) Oil wells; (q) Quarries, including gravel pits; (r) Railroads; (s) Sanitary landfills; (t) Service centers (e.g., oil and lube, brake, or transmission centers) with pits and in-ground lifts; (u) Sports arenas; (v) Swimming pools; (w) Tennis clubs; (x) Theaters and auditoriums; and (y) Wineries. d) If a Project will finance both a New Business and a Limited or Special Purpose Property, the Applicant must contribute at least 20% of the Project cost. The Debenture will finance no more than 30% of the Project and at least 50% of the Project financing will be from state or local government, banks or other financial institutions, foundations or other non-profit institutions.
iiThe additional Borrower’s contribution will reduce the SBA’s portion of the financing91 ch
ii. The additional Borrower’s contribution will reduce the SBA’s portion of the financing.
iiiThe Borrower’s equity in land and/or buildings previously…176 ch
iii. The Borrower’s equity in land and/or buildings previously acquired may be counted toward the Borrower’s contribution if the land and/or buildings are part of the Project.
ivIf the Borrower’s contribution is borrowed1,249 ch
iv. If the Borrower’s contribution is borrowed: a) Any lien position on the Project Property must be subordinate to the 504 loan; b) Only in situations where the borrowed contribution is collateralized by the Project Property, Borrower may not pay the loan for its contribution at a faster rate than the 504 loan (13 CFR § 120.912) unless it is approved in writing by the D/FA or designee; and c) If the borrowed contribution is collateralized by assets other than the Project Property, the Borrower must demonstrate repayment of the loan for its contribution from the cash flow of the business or other sources. f. Additional Borrower’s Contribution and/or Collateral The required Borrower’s contribution, as set forth in Paragraph 1.c. immediately above, and collateral, as set forth in Paragraph 2.a. of this Chapter below, on SBA 504 loans are the minimums required by policy. However, in some cases it may be appropriate to consider additional Borrower contribution and/or collateral to mitigate the credit weaknesses of a proposed project. Examples of such credit weaknesses include: i. Marginal historical or projected cash flow; ii. Limited working capital; iii. Recent significant increase in debt; iv. Restricted or limited customer base;
vLimited or no net worth6,717 ch
v. Limited or no net worth367 ch
v. Limited or no net worth. This list is not intended to be all-inclusive and SBA may determine that other circumstances necessitate additional Borrower contribution and/or collateral. g. Global Cash Flow Analysis The following may be included in the global cash flow analysis. Note: Repayment ability is determined based on the operating company cash flow analysis.
iPersonal discretionary income analysis with outside income434 ch
i. Personal discretionary income analysis with outside income: a) Any income not generated from the Applicant, such as spousal income, affiliate income, or interest income is considered outside income. b) Outside income can be used to offset personal obligations and living expenses. However, outside income may not be added to the business cash flow because repayment ability analysis must be based on the cash flow of the business.
iiRental Income500 ch
ii. Rental Income Anticipated cash flow from rental income from the Project Property may be included in the global cash flow analysis. However, it must not be included in the repayment ability analysis. h. Independent Studies or Reports Reports prepared independently of the small business may be beneficial in mitigating any weaknesses identified in the credit analysis. Examples of these independent studies/reports may include: i. Feasibility studies; ii. Hospitality facility assessment reports;
iiiEnergy audits; and24 ch
iii. Energy audits; and
ivFranchise (as defined by FTC) assessment reports569 ch
iv. Franchise (as defined by FTC) assessment reports. i. Feasibility Studies SBA has the regulatory authority to request a feasibility study when it is needed to further understand the small business type and market conditions at the project location. The SLPC Director will request a feasibility when appropriate. The following may cause SBA to request a feasibility study: i. Market saturation by industry type and location; ii. Unique market concept; iii. Highly specialized Project property; iv. Project size disproportionate to size of community it will serve; or
vSignificant rapid growth of the Applicant and/or affiliate group…4,823 ch
v. Significant rapid growth of the Applicant and/or affiliate group with a corresponding increase in undisbursed and/or unseasoned debt. j. Ratio Analysis A ratio analysis of the Federal tax returns and interim financial statements including comments on any trends and a comparison with industry averages. The analysis must include a review of calculations (based on the pro-forma Balance Sheet and historical and projected Income Statements) for the following financial ratio benchmarks: i. Current Ratio; ii. Debt/Tangible Net Worth; iii. Debt Service Coverage; iv. Any other ratios that are relevant for the business/industry (e.g., inventory turnover, receivables turnover, and payables turnover, etc.) including discussion of the CDC’s comparison to industry trends. k. Owners or Manager’s Experience A discussion of the owners’ and managers’ relevant experience in the type of business, as well as their personal credit histories. A description and history of the business including: i. Nature of the business; 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. l. Collateral Analysis The CDC must discuss the collateral and lien position. CDC must disclose any deed restrictions on the project property. m. Life Insurance Analysis The CDC must include a discussion of its analysis whether life insurance is required in accordance with Section A, Ch. 5 Para. C.5, Life Insurance. If life insurance is required, include the calculation of the amount required. If the CDC determines the viability of the business is not tied to an individual, include an explanation of this determination. n. Credit Reports CDCs are required to obtain and review personal credit reports for all guarantors and individual affiliates who are guarantors, and individual co-borrowers; business credit reports are not required. The analysis must include a discussion of the Applicant’s credit history, and any experience the CDC may have with the Applicant. Credit reports are not required on non-guarantor affiliates. Credit reports must be current within 90 days of issuance of an SBA loan number, or within 90 days of submission to SBA for non-delegated processing. o. Current on Taxes The CDC must verify the Applicant is current on all Federal, State, and local taxes, including but not limited to income taxes, payroll taxes, real estate taxes and sales taxes. For more information, see Section A, Ch. 1, Para. E, Types of Ineligible Businesses. p. No Prior Loss to the Government or Delinquent Federal Debt SBA may not approve a 504 loan to an Applicant who has a Prior Loss to the government or Delinquent Federal Debt. For more information, see Section A, Ch. 1, Para. E, Types of Ineligible Businesses. q. Payment Delinquencies, Liens and Bankruptcies The CDC’s credit memorandum must include a discussion on payment delinquencies, judgments, liens, bankruptcy filings, pending litigation, Federal or state tax filings, or other relevant information from the credit reports. r. Affiliate Financial Statements The last 2 fiscal year-end financial statements and/or Federal income tax returns of affiliates (or 3 years, if the Industry Size Standard is used to qualify for SBA Size Standard) should be included in the CDC’s submission to SLPC. The CDC must also provide an analysis of these returns and statements including a complete debt schedule and discussion on the types and terms of the existing loans, debt, or credit facilities. s. Miscellaneous Matters that the CDC Must Address in the Credit Memorandum i. Applicant meets requirements for SBA financial assistance under SBA Loan Program Requirements. ii. The Interim Loan (if any): a) Does not cover the Applicant’s contribution; b) Source has the experience and qualifications to monitor properly all Project construction and program payments c) Source is not: i) From any SBA Program, directly or indirectly; or ii) The Applicant or an Associate of the Applicant; and d) Terms and conditions of the financing are acceptable. iii. The Third Party Loan: a) Is at least as much as the 504 Loan (net debenture proceeds); b) Has a term of at least 7 years for a 10-year debenture and at least 10 years for a 20-year or 25-year debenture; c) Interest rate is reasonable. iv. Any financing provided by the seller of the Project Property is subordinate to the 504 loan and may not be prepaid without SBA consent. v. None of the 504 loan proceeds are being used to provide or refinance funds used for payments, distributions, or loans to Associates of the Applicant.
viThe Debenture Pricing27 ch
vi. The Debenture Pricing.
viiIf Applicant is an Eligible Passive Company646 ch
vii. If Applicant is an Eligible Passive Company: a) The EPC and OC both meet requirements for SBA financial assistance under SBA Loan Program Requirements; b) The EPC will use the 504 loan proceeds to acquire or lease, and/or improve or renovate real or personal property (including eligible refinancing) that it leases 100% to the OC; c) The lease between the EPC and the OC will: i) Be in writing; ii) Have a remaining term at least equal to the term of the loan (including options to renew exercisable solely by the OC); iii) Be subordinated to SBA’s lien on the property; and iv) Have rents that will be assigned as collateral for the loan.
viiiThe Gross Debenture amount does not exceed the amounts…107 ch
viii. The Gross Debenture amount does not exceed the amounts established by SBA Loan Program Requirements.
ixThe Applicant’s use of proceeds complies with SBA Loan Program Requirements81 ch
ix. The Applicant’s use of proceeds complies with SBA Loan Program Requirements.
xWhether the loan is for the following special purpose or the…311 ch
x. Whether the loan is for the following special purpose or the Applicant is or does one of the following: Disabled Assistance Loan Program (DAL), Energy Conservation, Qualified Employee Trusts (ESOP), or Pollution Control Program. If so, PCLP CDCs may not approve the loan under their delegated PCLP authority.
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