The Small Business Administration is cutting some red tape–along with other changes–for some of its most popular loan offerings.
August 15, 2023 | Melissa Angell, Policy Correspondent, Inc.
Big changes kicked in this month for small business lending, as the Small Business Administration works to expand access to capital
At the start of August, an updated Standard Operating Procedure, a set of guidelines governing guaranteed loans including the 7(a) and 504 lending programs, went into effect. Among other things, banks will see fewer fees, and borrowers can expect higher loan sizes, as well as a new stance on how you can apply those funds.
Those changes and others are outlined below:
1. Bigger loans
For starters, the SBA formally bumped the limit for its 7(a) small dollar loans to $500,000, up from $350,000. While the agency announced in mid-May that it was increasing its small dollar loan size, issuing formal SOP guidance solidifies that announcement. “Lenders tend to follow SOP guidance more than SBA notices,” Jennifer Bodenrader, the SBA program manager at Rockland Trust Bank. “The SBA notices can be onerous to manage in conjunction with the SOP.”
The agency also clarified the maximum amount someone can borrow from the 7(a) loan program; the cap is $5 million. So theoretically, a founder only taking on small 7(a) loans could have up to 10 of them, at a maximum of $500,000 a pop.
Going this route can offer a more expeditious process for founders, as small loans tend to have fewer requirements. “The SBA allows for more streamlined underwriting procedures for loans that meet the definition of 7(a) Small,” says Adam Zaabel, an executive vice president at Newity, a Chicago-based lender service provider. “By raising the dollar amount of the definition, this may help expand lending.”
2. Less red tape
The paperwork requirement lenders previously faced may also diminish. Previous documentation lenders had to analyze include three years worth of business tax returns, a full guarantor analysis, and monthly financial statements. But with the SBA loosening requirements with its latest guidance, lenders are no longer required to scrutinize those, Bodenrader says, though they might still choose to do so as they determine if a potential borrower is creditworthy.
The change allows for a more streamlined underwriting procedures, Zaabel says, allowing lenders to “align their SBA program more closely with their traditional commercial loan offerings.”
While less documentation may be formally required, Bodenrader notes that many lenders might keep up this practice, as it can help determine if a potential borrower is creditworthy. The SBA now completes eligibility verification and fraud checks on small businesses, and lenders are always able to ask for more paperwork should they feel the need to do so.
3. Reduced fees
The SBA’s announcement requires lenders to charge a fixed fee of up to $2,500 per loan. This is not an origination fee, which per a separate recent rule change
is now laddered, depending on the size of a person’s loan.
“This is an SBA packaging fee, which is similar to an origination fee as it provides the lender with fee income to offset the expense of originating an SBA loan,” Bodenrader says. Before, lenders could charge various loan percentages depending on the loan amounts, which capped out at $30,000 per loan.
4. Simpler acquisition standards
While businesses could purchase other companies before with SBA-backed loans, they only could do so if they assumed total ownership of a new company. The SBA now allows companies to use 7(a) loans or SBA express loans to buy partial stakes in a business.
5. Leaving insurance up to the lender
The SBA is no longer requiring life insurance on SBA loans. Going forward this stipulation will be up to the lender; some vendors may continue to require life insurance if they make that a requirement on their non-SBA loans. Previously, the SBA required life insurance on loans clocking above $350,000 if the loan was not fully secured.
And for loans under $500,000, additional hazard insurance is only required for SBA loans that are used to buy, refinance or improve real estate.
6. No more equity injections for startups
If you have a startup (defined as a company that’s been in business for fewer than two years), equity injections–cash or other assets that are not on a loan applicant’s balance sheet–are not required. Previously, entrepreneurs needed to have invested an amount worth 10 percent of the business into their company before a bank could issue SBA loans. It’s unclear whether lenders will actually adopt this policy, since so-called skin in the game can curb lending risk.
7. Affiliation changes
To determine if a company is truly small and qualifies for an SBA loan, lenders need to carry out affiliation tests. An affiliation test examines if a business is associated with another business; an independently run franchise location might, for instance, qualify as small versus a corporate-owned store.
Before the agency’s August guidance, there wasn’t a clear framework around how to determine whether one business was affiliated with another, says Zaabel. Now that’s changed.
If a company owns 50 percent of another business, and works within the same industry under the government’s classification system, the two are considered affiliates. Entrepreneurs seeking out SBA loans should pay attention, especially if they hold a stake in another company.