Updates to the SBA 7(a) and 504 loan programs give SBA lenders more flexibility when providing loans for business acquisitions. Of course, those same lenders still have their own bank policies which override SBA rules, but many SBA lenders will likely be adjusting their underwriting process over time due to these updates.
Summary of Changes:
Reduction of Insurance Requirements
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 no longer required for loans under $500,000 unless real estate is collateral on the loan.
Streamlined SBA Lending Criteria for Loans under $500,000
SBA relaxed the amount of due diligence and documentation lenders must use in determining creditworthiness and reasonable assurance of payment. SBA lenders can now use modern underwriting tools, including credit scoring, and can take the applicant’s income and collateral/assets into account when assessing the loan.
Personal Liquidity Rules and Limits Removed
Historically, a high-net-worth applicant for a business loan had to show that the funds requested were not available from personal resources, meaning all the borrower’s usable liquid assets were reviewed. Under the new rule, SBA lenders are not required to evaluate the personal liquidity of the applicant.
Broader Affiliation Rules
The SBA’s affiliation standards have historically been quite complex. The goal of the previous guidance was to determine who “controls” a business entity. If you exerted control over the entity, then you were considered affiliated. Previously, lenders reviewed franchise and management agreements to ensure that the managing business/franchisor did not have too much control over a borrower.
Moving forward, the “control” element of affiliation is completely removed. Affiliation will boil down to percent ownership of other entities, with more than 50% generally being the threshold. The principle of control has been removed and lenders will only be evaluating ownership percentage.
Equity Injection Changes
Lenders now have fewer requirements by the SBA and can use more of their own discretion and policies to determine whether the required equity injection comes from the buyer only or if seller financing can be used to help meet that requirement. This change will probably be applied in very limited situations, such as, the buyer being a key employee of the business being acquired.
Partial Changes of Ownership
This amendment to the SBA Loan program will permit borrowers to use SBA Loan proceeds to purchase a portion of a business or a portion of another owner’s interest in a business or interests of multiple business owners. This change will result in more flexible succession planning options for current business owners. Also, for partial changes of ownership, the SBA will allow the selling owner to remain as an owner and involved in the day-to-day business, including as an officer, director, “Key Employee,” or employee.
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As the Loans4Biz Program Manager for the CBI Team, I can help you understand how these changes affect you and your situation. I also work with a lot of lenders, some of whom will be implementing these changes more quickly than others. To learn more about these changes or the Loans4Biz program, contact me (Kelly Tivis) @ 877-582-5200 or kelly.tivis@cbiteam.com.
The Loans4Biz program helps borrowers obtain financing for business acquisitions and saves borrowers time and money by offering the following benefits on most deals:
– Assistance with gathering and completion of documents required by most lenders
– Initial communication with lenders managed by the Loans4Biz program manager
– Much better chance of finding a lender who is interested in providing a loan
– Several financing options presented for consideration
– Getting to the closing table quicker
Although the Loans4Biz program was created to assist buyers of businesses listed by CBI, the benefits of using the Loans4Biz program are available to anyone who needs assistance with financing a business acquisition…whether or not you are buying a business listed by CBI.
To learn more about the Loans4Biz program, contact Kelly Tivis @ 877-582-5200 or kelly.tivis@cbiteam.com
