I need some clarification on what a "start-up" is considered under CRA as I cannot find it within the regulation. Would you consider the purchase of an existing business, new entity same line of business, as a start-up when reporting gross annual revenue and report $0. Or, if you collect the gross revenue from the prior owner, would you report that amount?

I would say you report $0 as your borrower has no sales. I cannot find anything in the regulation, CRA guide and Q&A stating otherwise. I would say that the prior revenue would be more considered a projection. The reason I am asking is that I came across this post dating back to 2008 on BOL and I did not see anyone contest it.

"Be careful on what they are calling a start up though. We got in trouble because our LOs were calling new LLPs startups when they really were breakoff companies of the main business, usually to hold RE. Also the regulators (at least ours) won't let you call a business "startup" when the borrower is purchacing an ongoing business. We had some of those too. If the LO is basing the loan on what the business has done in the past, then you should be using the revenues of the business being purchased." [i][/i][u][/u]

Don't get hung up on the concept of "Start-up" - what's relevant is the GAR. For any business it's the actual gross revenues you relied upon when making your credit decision. For start-ups that almost always is going to be zero unless you have financial statements for part of the fiscal year for the business.

If the situation involves a corporation and a change in ownership - the borrower remains the same, the corporation. So you would use whatever historical financial data for the corporation you relied upon. It would not be a start-up.

On the other hand if a business sold its assets to a new business that was started up to acquire the assets of the original business and you lend to the new business, that would be a new business entity with no financial history, a start-up situation and you would rely upon any actual historical financial information you have for that new entity to determine the GAR. If the new corporation has just been formed and you are lending to it and there is no historical financial data, the GAR would be "0".

I think I got it. So what about in this situation.

Joe's Crab Shack is for sale. The borrower is buying Joe's Crab Shack, keeping the name of the restaurant, but holding it under a new entity. We are financing that purchase. The borrower has no sales at this point, would you suggest that the GAR is $0 or the prior year of the original owner since it is the same business technically.

I am leaning towards $0 as the new entity we are lending too has no revenue. Thoughts? We do a lot of restaurants so I just want to make sure I am doing this right. Thanks.

That would be correct since the entity is new, but you also have to consider the GAR if there are parents of the company. Say if your borrower is a start up and he gets an equity investor whose GAR is 2.4MM then it pushes the loan over the threshold. Also, if you are subject to the lending test make sure the loan is over 1MM if it is non-real estate secured, or the loan is permanent in nature secured by nonfarm nonresidential real estate.

And remember the size test you are referring to is for the Community Development purpose of Economic Development. So if the borrower is earning 1MM in revenue look to see if it works under revitalization/stabilization.

If the GAR is $0, would it be coded as a "1", under $1 million or a "3", not known on the CRA LR?

If you know the business does not yet have revenue, thus $0 revenue, then it is not unknown. $0 is less than $1MM.

For startups the typical answer is either zero or a small sum that is less than $1 million. If the company is just starting up the answer is obvious. But if the company is 10 months into its first year it may be more or less than $1 million. Is this a situation that actually is in the process of starting up, or has it been operating for some time and if so, do you have any revenue information?