The Small Business Administration (SBA) has released new Standard Operating Procedures (SOP), which have created changes to their 7(a) and 504 lending programs. These programs support small business owners by helping them get access to the funds they need in order to start and grow their business. With the updated criteria, access to SBA loans has been expanded, making it easier for underserved communities like women, minority, veteran, and rural entrepreneurs to get the money they need.
Here’s the main things you need to know about these new changes:
1. Rules around equity injection have changed
An SBA loan equity injection is a down payment that certain applicants must provide to qualify for an SBA 7(a) loan or SBA 504 loan. The updated requirements regarding equity injections have an effect on acquisitions, startups, and ESOPs.
For Acquisitions: When purchasing a business that results in a complete change of ownership, the SBA requires an equity injection of at least 10% of the total project costs. Any seller debt on full standby (not accepting payment of principal or interest) can now be fully eligible as consideration for equity injection.
For Startups: The SBA now has no equity requirement for startup businesses. Instead, equity injection requirements for each applicant will be determined by a bank’s internal credit policy.
For Employee Stock Ownership Plans (ESOPs): Lenders with delegated authority can now submit ESOP transactions as such. Loans made for the purpose of purchasing a controlling interest in the employer’s small business (over 50%) do not have a required equity injection.
2. Loans can now be used for partial changes of ownership.
Partial business acquisitions are now eligible through SBA loans. For partial changes of ownership, the selling owner is also now allowed to “remain as an owner and involved in the day-to-day business, including as an officer, director, key employee, or employee.” These new allowances can help create exciting opportunities for deal structures that benefit all parties involved.
3. The principle of control of one entity over another has been removed from the SBA’s affiliation consideration.
Removing this principle, which was used to determine whether the business is considered “small”, simplifies the way that lenders can determine affiliation. This results in a removal of provisions on affiliation arising from management and control, franchise or license agreements, and identity of interest.
Previously, lenders reviewed franchise and management agreements to ensure that the managing business/franchisor did not have too much control over a borrower. With the new updates, lenders will only be evaluating ownership percentage, with more than 50% generally being the threshold.
4. Personal resource test has been eliminated.
Before the new SBA SOP, a business loan applicant had to show that the funds requested were not available from their personal resources, meaning all the borrower’s usable liquid assets were reviewed. Now, SBA lenders are not required to evaluate the personal liquidity of the applicant during the review process.
5. Lending criteria for loans under $500,000 has streamlined.
For loans under $500,000, the SBA has relaxed the amount of due diligence and documentation lenders must use in determining creditworthiness and reasonable assurance of repayment. Lenders can now use any (or a combination) of the three criteria when approving loans:
- The credit score/credit history of the applicant, its associates, and any guarantors.
- The earnings or cashflow of the applicant.
- Any equity or collateral of the applicant.
6. Refinancing business debt is now simpler.
Rules around loans that are eligible to be refinanced have been streamlined, which makes it less difficult for a lender to refinance its own debt or the debt of another lender.
7. Insurance requirements have changed
Life insurance is no longer a requirement for 7(a) and 504 loans, and the decision to assign a policy as collateral is left up to lenders. Hazard insurance is also no longer a requirement for loans under $500,000, with the exception of real estate collateral. These insurance requirements are now reliant on a bank’s internal policies.
Thanks to the new SOP, SBA loans are more accessible than ever. If you think your business qualifies and could benefit from such a loan, Grasshopper’s SBA Lending Team is an incredible resource to have. With an established group of seasoned professionals who have decades of experience partnering with small businesses, our SBA lending team can devise effective financing structures to help you produce optimal results and grow your business with confidence. Connect with a team member today:
For more information on the SBA SOP, click here.
By Michaela Lenahan in SBA Lending