Small business lending might have received a boost with changes to the Small Business Association (SBA) loan guarantee programs.
While the SBA’s 7(a) loan is a great opportunity for new would-be business owners to finance their business, the requirements can be tough to meet. To remove some of the obstacles and make this a more viable choice for business owners, the SBA made changes to its standard operating procedure according to a press release from March 26 of this year.
What Do the Modifications Do?
The primary modifications pertain to acquisition financing and funding.
For starters, equity injection requirements have been lowered, which eases the pressure on buyers to cough up the cash for their deals. The former rules required 25 percent in seller notes or buyer equity for sales with more than $500,000 in goodwill and 20 percent for deals with less than $500,000 in goodwill. (note: equity injection simply means some form of security such as cash, personal assets, or even debt owed to the borrower)
That rate has been reduced to 10 percent for either of those situations. A minimum of 5 percent cash must come from the buyer, but the other 5 percent can be from a seller note.
This change helps business owners who have the drive and the dedication but haven’t come up with a lot of cash yet to finance their venture.
If a portion of the 10 percent does come from a seller note, there are other rules that must be adhered to if the seller debt is viewed as part of the equity.
Would-be business owners should keep in mind the 10 percent injection is the minimum to qualify for the SBA funding. However, some lenders may still require more cash upfront to satisfy their own conditions.
The changes also may improve franchise financing opportunities.
In the past, people pursuing franchise business opportunities were ineligible for SBA loans, according to Inc. Because their businesses would fall under the rules of the franchiser, they were viewed as an affiliate by the SBA, not as a standalone business.
But because there are a lot of franchises out there, and to better serve the individuals interested in pursuing these opportunities, the SBA revisited its rule pertaining to franchise businesses. Now, if franchisers go through the steps of having their business added to a list of franchisers, interested buyers can be eligible for a franchise loan.
What It Can Mean for Small Businesses
Small business lending has experienced a recent boost and is expected to benefit from these newest changes as well.
While the past three years have been record-setting for the collective dollar total of SBA 7(a) loans, this first quarter of 2018 has been even better.
Collectively in 2017, the loans totaled $25.8 billion. The first quarter of 2018 has shown a 20 percent year-over-year growth in lending, according to data from BizBuySell.
Furthermore, the data shows the number of business-sale transactions has been going up steadily since 2013, but that number has jumped dramatically in the past year. There were 7,842 businesses sold in 2016. That number had increased to 9,919 in 2017.