At their quarterly meeting held on April 11, 2023, the US Small Business Administration (SBA) has made several notable changes to their rules and regulations. The SBA is amending various regulations governing SBA’s 7(a) Loan Program and 504 Loan Program, including regulations on use of proceeds for partial change of ownership, lending criteria, loan conditions, and affiliation standards, with the goal of expanding access to capital for small businesses.
Background
The 7(a) Loan Program
The SBA’s most common loan program. It includes financial help for small businesses with special requirements. This is the best option when real estate is part of a business purchase, but it can also be used for:
- Short- and long-term working capital
- Refinance current business debt
- Purchase furniture, fixtures, and supplies
The 504 Loan Program
This program provides long-term, fixed rate financing for major fixed assets that promote business growth and job creation. 504 loans are available through Certified Development Companies (CDCs), SBA's community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by the SBA.
A Summary of The More Impactful SBA Procedural Rule Changes:
1.) Restrictions on use of proceeds:
SBA will be lifting its requirement that a change of ownership be a “complete” change of ownership, allowing for partial changes of ownership after May 11, 2023. Sellers will now be able to sell a portion of their ownership in a business.
What does this mean? Loans for partial change of ownership are permitted (think management succession planning.)
2.) SBA is removing the requirement for hazard insurance for SBA loans up to $500,000 —an increase over the threshold of $150,000 in the proposed rule.
3.) Streamlining SBA lending criteria:
SBA Lenders can now incorporate the use of modern underwriting tools (credit scoring) for a faster and more streamlined underwriting process.
4.) SBA is changing the Affiliation Rules for its loan programs as follows:
Affiliation based upon Common Management, Identity of Interest, and Franchise Agreements are being eliminated. After May 11, 2023, businesses will not be found to be affiliated on these bases.
What does this mean? These revisions remove the principle of control of one entity over another from consideration of affiliation; therefore, the mere fact that an applicant may be a franchisee is NOT in itself a reason that would render the applicant ineligible for an SBA loan.
One Size Does Not Fit All
While the latest SBA changes will impact certain aspects of the 7(a) and 504 Loan Programs, other provisions still apply. It’s important to carefully compare SBA Loan Programs to determine your eligibility and which is the right choice for your particular circumstances. Be sure to check with your financial advisor.
If you have any questions about this article or need more information other loan financing options, please contact Pete VanPutte at (585) 259-5181 or pvanputte@tbgcappartners.com.
TBG Commercial Capital partners works to meet the financing needs of developers, property owners, business owners and entrepreneurs, and their need to secure capital.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.