August 16, 2023 | Andy Medici, Senior Reporter, The Playbook
The Small Business Administration has made a number of changes to streamline its 7(a) loan program — and bankers say it’s made the loan process faster, while also creating a few new headaches.
The changes include a number of forms, often redundant, that are no longer required, according to Jennifer Bodenrader, SBA program manager at commercial bank Rockland Trust.
Background and fraud checks once performed by the lender are now down by the SBA instead, saving a lender days of waiting. She estimated that some SBA loans can now be done in five days — although some could still take longer depending on a variety of external factors the lender does not control.
“It is faster for the customer because it’s faster for the lender,” Bodenrader said, adding that an additional form the lender was required to fill out each time a loan disbursement was made is also no longer required. “That process is no longer required. That is big time savings for the customer and for us.”
SBA unveils several changes to loan programs
Over the last year, the SBA has proposed and rolled out a dizzying series of changes to its 7(a) and 504 loan program in a bid to boost participation and encourage smaller loans.
We gathered up those changes and spoke to lenders and others familiar with the SBA process, who believed that, on balance, those changes will mean time savings and fewer headaches for business and banks alike — as well as open up new opportunities for potential borrowers.
Adam Zaabel, head of credit at small-business loan service provider Newity, also believed the changes strengthened and streamlined the program.
“I think on balance, I am pleased with the changes. I think that the SBA has done what they can to make the program as accessible as possible to small business owners, and that’s the direction we need to be going,” Zaabel said.
He noted there are other changes, including dropping a requirement that borrowers have flood insurance coverage even for loans that are not related to the real estate, which previously made working capital and other loans harder. Now, lenders can use their own criteria to ensure the loan is secured.
But there are complications, too. The SBA has dropped its use of “franchise director” in favor of letting the lender decide. But Zaabel said that means the lender must now examine franchise documents itself to ensure control rests with the borrower — and it’s yet to be seen if that complicates things.
The raft of small changes are part of two larger rules finalized by the agency in 2023, including a rule that ended the moratorium on nonbank lenders in its programs and a separate rule that streamlines affiliation requirements and other aspects of its lending program. It is also separate from a series of changes the SBA recently announced for its disaster lending program, which dramatically boosted loan sizes and extended deferment periods for homeowners and business owners alike.
But there is also one potential downside for business owners. Before, the SBA prohibited lenders from charging a flat free for their loans in addition to the origination fees. But now lenders are allowed to do so, up to $2,500, so business owners will have to be careful.
Key changes to SBA loan programs
Additional changes include:
- The SBA now being responsible for determining loan eligibility. Previously, it was on lenders to determine if a business was eligible.
- Collateral no longer required for loans of $50,000 or less — double the previous $25,000 limit. Personal guarantees are still in place.
- Lenders no longer having to analyze both ownership and overall “control” of the business when determining size standards, which could be subjective. Now, it’s only ownership.
- SBA now conducting its own fraud check on every loan, which experts say has grown out of its extensive efforts with the Paycheck Protection Program.
- Lenders previously needed to generate a loan authorization, which the SBA will now do with information already provided on the loan documents.
- Instead of having to include a narrative on why credit was not available elsewhere for the borrower, the lender can now choose from a list of common reasons.
- The SBA will now provide small-business scores on all 7(a) loans under $500,000, except for a few specific loans. Before, the lender had to provide those scores.
- Simplified underwriting for loans of $500,000 or less, raised from the previous $350,000.
- Lenders now being able to use their own financial information verification processes for loans under $500,000 instead of having to obtain tax return transcripts and reconcile that with the application.
- Lenders now being able to use a universal purchase package for all 7(a) loans regardless of size or delivery type, as opposed to having a variety of different purchase packages.
- For loans under $500,000 for new businesses or complete changes of ownership, a 10% equity injection is no longer mandated. Instead, lenders can use their own policies for similar private sector loans. For larger loans that do require 10% equity, lenders can now follow their own policy for verifying that, instead of the SBA requirements.
A change made earlier in 2023 also allows SBA loans for partial changes of ownership. That would include someone buying into a business or selling a piece of a business — a great way for aspiring entrepreneurs to get into a business and learn alongside the prior owner, Bodenrader said.
“That’s a pretty big deal,” Bodenrader said. “I think this change actually reduces risk for the taxpayers, and I think there are a lot of people out there that want to be a small-business owner in partnership with an experienced owner.
Bodenrader said that SBA loan terms are typically longer than the four to seven years businesses typically get from private loans — which lowers the monthly payment. She added that the SBA can “blend” real estate and equipment or working capital loans to get a longer loan term for both. Conventional typically lenders break different needs up into separate loans.
“That’s a real benefit to the cash flow of a small businesses,” Bodenrader said.
Meanwhile, traditional lenders are cutting back or tightening their requirements, such as the amount of money borrowers have to put down to secure the rest, she added.
“I think you see a lot of lenders are tightening their loan-to-value. The SBA is loosening its requirements,” Bodenrader said. “We don’t want to stop the growth of small businesses.”
Experts stressed that SBA loans, in a high interest rate environment where such loans can be around 11%, are still a great deal. They also come with no prepayment penalty.
“I think it’s the best possible option in the market place I really do,” Zaabel said. “A lot of the loans we see out there in the marketplace are one-year loans, so even if the interest rates are not terrible, they are still higher than the SBA, and it’s a one-year repayment term and it’s a huge cash flow issue for small businesses.”