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Small Business and SBA Lending Blog
Last updated on May 31, 2023
5 min read
by Jeff Hamann

Understanding SBA Loans: What Is an EPC and an OC?

This comprehensive guide provides key insights into what an EPC and an OC are, and how they form the backbone of SBA financing strategy.

In this article:
  1. The Importance of EPCs and OCs in SBA Loans
  2. Understanding Eligible Passive Companies (EPC)
  3. Definition of an EPC
  4. Characteristics of an EPC
  5. Common Misconceptions about EPCs
  6. Exploring Operating Companies (OC)
  7. Definition of an OC
  8. Characteristics of an OC
  9. Common Misconceptions about OCs
  10. The Relationship Between EPCs and OCs
  11. How EPCs and OCs Interact in a Typical SBA Loan Scenario
  12. EPCs and OCs in the Context of SBA Form 1919
  13. Tips for Completing the EPC and OC Sections of SBA Form 1919
  14. Wrapping Things Up
  15. Moving Forward: Navigating SBA Loans with Confidence
  16. Get Financing
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The world of Small Business Administration (SBA) loans can be a labyrinth of complex terms and regulations. These loans, designed to support small businesses with capital, often come with intricate compliance stipulations. 

One particular area that tends to confuse borrowers is the concept of Eligible Passive Companies (EPCs) and Operating Companies (OCs). Their roles, though pivotal in the SBA lending landscape, often remain shrouded in mystery for first-time loan seekers and even seasoned entrepreneurs.

The Importance of EPCs and OCs in SBA Loans

EPCs and OCs play an instrumental role in the SBA loan process. They directly influence the borrower's ability to secure financing and comply with SBA's lending requirements.

Understanding the characteristics, similarities, and differences between these two entities is key to successfully navigating the complexities of SBA loans and increasing the likelihood of loan approval.

Understanding Eligible Passive Companies (EPC)

Definition of an EPC

An EPC is a real estate holding company that owns assets but does not actively participate in the business operations that use these assets. In the context of SBA loans, the EPC is often the entity that owns the commercial real estate or long-term assets that the OC uses.

The EPC is usually a separate legal entity, often established by the owner of the OC, specifically for holding these assets.

Characteristics of an EPC

Several distinctive characteristics define an EPC. First, as per the SBA's regulations, an EPC must lease 100% of its assets to one or more Operating Companies. 

Second, the EPC cannot be involved in any operations. Its sole purpose is to hold the assets that the OC uses. 

Lastly, the EPC's financial condition, along with the lease agreement with the OC, plays a crucial role in the approval of an SBA loan.

Common Misconceptions about EPCs

A common misconception about EPCs is that they are unnecessary or complicated structures that complicate the loan process. However, the EPC structure is a strategic tool that separates personal liability from business operations. 

It also allows the business owner to maintain control over the property if the business operations were to change or dissolve. Another misconception is that EPCs can engage in business activities. They cannot, as it is contrary to the SBA's rules.

Exploring Operating Companies (OC)

Definition of an OC

In the realm of SBA loans, an Operating Company (OC) is the business entity that actually conducts the operations. It rents or leases its operating space and assets from the EPC, thereby separating the liabilities of owning the assets from the liabilities of the business operations.

Characteristics of an OC

An OC actively engages in business operations and generates revenue. It leases assets from an EPC and is expected to be profitable to repay the SBA loan. The OC must also demonstrate its capability to sustain its operations, showcasing stable revenue streams and sound business strategies.

Common Misconceptions about OCs

One major misconception about OCs is that they can own property. In SBA lending scenarios, the property is generally held by the EPC, not the OC. 

Another misconception is that the OC's profits are the primary factor in determining loan approval. While the OC's profitability is crucial, the SBA also considers other factors like the viability of the business plan and the industry's economic outlook.

The Relationship Between EPCs and OCs

OC provides the operating viability and cash flow that ensure loan repayment. This symbiotic relationship between the two structures allows for a balance of business agility and asset protection, which ultimately minimizes risk to both the borrower and the lender. It is this unique interaction that makes EPCs and OCs critical to the structuring of SBA loans.

How EPCs and OCs Interact in a Typical SBA Loan Scenario

The interplay between an EPC and OC typically starts when an entrepreneur decides to purchase real estate for their business. The EPC is established to acquire the property, while the OC leases the property from the EPC. 

When it comes to the SBA loan, the EPC, as the property owner, is the borrower, with the OC serving as a guarantor. The OC's lease payments effectively service the SBA loan, establishing a direct link between the OC's operations and the repayment of the loan.

EPCs and OCs in the Context of SBA Form 1919

SBA Form 1919, also known as the Borrower Information Form, is a required document for every SBA loan application. In this form, the roles of the EPC and OC are clarified, helping the SBA understand the proposed loan's structure and repayment strategy. 

Information about both the EPC and OC are required, including details about their relationship, the nature of the lease agreement, and the OC's ability to make the lease payments.

Tips for Completing the EPC and OC Sections of SBA Form 1919

Accuracy and thoroughness are crucial when completing the EPC and OC sections of SBA Form 1919. Ensure you clearly delineate the roles and structures of the EPC and OC, providing precise details about the leasing agreement. 

Be prepared to provide evidence of the OC's operational history and financial viability. If you're uncertain about any section, consider seeking advice from our expert advisory team or a business attorney.

Wrapping Things Up

As we’ve discussed, EPCs and OCs play vital roles in SBA loans, defining the structure of the loan and influencing the borrower's ability to secure financing. 

The EPC, as a real estate holding company, helps to protect the business owner from personal liability. The OC, on the other hand, is the operating entity, ensuring the repayment of the loan through its revenue-generating activities.

Moving Forward: Navigating SBA Loans with Confidence

Navigating SBA loans can be a daunting process, but a clear understanding of the roles and interplay of EPCs and OCs can significantly demystify the journey. 

With this knowledge in hand, you're better equipped to make strategic decisions that align with your business objectives and increase your likelihood of securing an SBA loan. It's all part of the unique adventure of entrepreneurship, empowering you to create a sustainable business that positively contributes to your community and the broader economy.

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