The Small Business Administration (SBA) made a number of significant changes to its loan programs this year. Select updates have direct impact on M&A transactions, making it easier to buy or sell a business. Here are some of the highlights:
Removing the requirement for a complete ownership change.
Previously, 7(a) loans could only be used for full transfers in ownership. Now, they can also be used for partial ownership changes.
This is an important shift that can help sellers seeking a new business partner, investor, or phased exit strategy. It allows a seller to stay actively involved in the business, either as a part-owner or employee, beyond the 12-month consulting period that was allowed under the previous guidelines.
Position of seller note.
Buyers acquiring an existing business need to inject at least 10% equity into the deal. However a seller note can now qualify as part of the buyer’s equity injection.
An additional rule change affects how seller financing can be paid. Previously, the seller note had to be on full standby for the life of the SBA loan. This meant that the buyer could not make any payments on the note until the SBA loan was paid in full.
Under the new rules, the seller note must be on full standby for just 24 months. After that, the buyer may choose to start making payments on the note. This change can help buyers secure seller financing while giving them more flexibility in how they manage their finances.
Simplified underwriting for loans under $500,000.
SBA lenders can now use their own credit policies for loans under $500,000, rather than having to follow the more stringent SBA underwriting standards. This will reduce due diligence and paperwork, allowing lenders to use their own criteria to determine if an applicant is creditworthy. Overall, this should streamline the process and make it easier for small businesses to get approved.
Reduced insurance requirements.
The SBA has eliminated the requirement for hazard insurance for loans under $500,000 (real estate excepted). Hazard and life insurance requirements will be left up to the individual lender. This will save borrowers money on the cost of insurance, and should reduce the time it takes to get a loan approved.
Modified affiliation rules.
The SBA has affiliation criteria used to determine size eligibility limits for SBA programs. Affiliation arises when one business controls or has the power to control another business, or when a third party has the power to control both.
Previously, the SBA considered several factors when determining affiliation, including ownership, common management, contractual relationships, economic dependence, and franchise/license agreements. Now, determining affiliation will be much simpler – determined by a percentage of ownership.
In addition to the changes mentioned above, the SBA has made a number of other updates. These include expanding the number of non-bank lenders that can offer SBA loans and expanding the Community Advantage SBLC license.
The Community Advantage program, which was previously in a pilot stage, is designed for nonprofits focused on underserved markets such as veteran- and minority-owned business as well as areas with high unemployment, low incomes, or low access to capital.
These changes are expected to reduce red tape and make it easier for small businesses to get financing. This should smooth the path for small business transitions, helping entrepreneurs acquire a business and giving owners more options for a successful, profitable exit.
For additional information on these SBA changes, view the procedural notice from the SBA.
Talk to your lender or contact a Cornerstone team member to learn how these changes may impact your acquisition or exit decisions.
