Preliminary Note: On Tuesday, April 9, 2024, the United States Department of Transportation issued a final rule that modernized the Disadvantaged Business Enterprise (DBE) program and the Airport Concessions DBE (ACDBE) program regulations. Review a copy of the final rule. The changes will go into effect on May 9, 2024. This blog is one in a series highlighting the changes and updates found in this final rule.
Are you thinking of buying or investing in a business with the goal of becoming a DBE, but don't have enough cash to cover the entire cost? Good news- you can use a loan to finance part of your ownership stake - if you follow rules set by the U.S. Department of Transportation (DOT) for its Disadvantaged Business Enterprise (DBE) and Airport Concession Disadvantaged Business Enterprise (ACDBE) programs.
The DBE and ACDBE programs aim to help small businesses owned and controlled by socially and economically disadvantaged owners (“SEDO”) participate in federally assisted contracts and concessions.
To apply for these certifications, you must show that you have made a real and substantial investment in the business, and that you are not merely a front for someone else. So, it is important to be aware of the requirements to obtain ownership via loan:
- You must have paid at least 15 percent of the total value of the investment from your own funds by the time the firm applies for certification. This means that you can't borrow the entire amount, and you need to show that you have some skin in the game.
- The firm may not be a party to the loan and its property cannot serve as collateral. This means that you can't use the business's assets or income to secure or repay the loan, and that the loan is solely your responsibility.
- The loan agreement must require regularly recurring payments of principal and interest according to a standard amortization schedule, at least to the point of obtaining the 15 percent payment. This means that you can't defer or skip payments, and that you need to pay off the loan over time.
- The loan must be real, enforceable, not in default, and on standard commercial, arm's length terms. This means that at the loan terms are fair and reasonable.
- The owner is the sole debtor, and the loan agreement permits prepayments, including by refinancing. This means that you can't share the loan with anyone else, and that you have the option to pay off the loan early or with a different source of funds.
- If the creditor forgives or cancels all or part of the debt, or the owner defaults, the debt-financed portion of the owner's purchase or capital contribution is no longer considered an investment. This means that you can't get a free pass on your loan, and that you need to keep up with your payments or risk losing your certification.
- You must demonstrate that the loan is being used to finance an investment that meets the requirements for ownership acquisition and maintenance. This means that you can't use the loan for other purposes, such as personal expenses or operating costs, and that you need to show how the loan helps you buy or contribute to the business.
- The loan must be real, enforceable, not in default, and not offset by another agreement. This means that you can't have a side deal with the creditor or the seller that undermines the loan, such as a promise to repay the loan with future profits or a guarantee of a buyback option.
- Debt-financed purchases or capital contributions are considered investments when they comply with the rules and finance the owner's qualifying purchase or capital contribution. This means that you can't use the loan to buy or contribute something that doesn't count as an investment, such as a non-voting share, a gift, or a nominal or symbolic item.
As you can see, using a loan to acquire ownership of a company is possible, but not without some strings attached. You need to make sure that your loan meets the criteria for a valid investment, and that you can prove that you are the true owner and control the business.
If you have any questions or doubts about your loan or DBE certification, please contact Danielle Dietrich, Esq. at ddietrich@potomaclaw.com or 412-449-9141.
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