The Small Business Administration (SBA) has recently announced changes to their loan programs. Since the SBA was introduced in 1980, it has provided cash advance sums to thousands of small businesses in the U.S. looking to start or grow their ventures. However, the program has vastly evolved. The SBA now brings changes at the start of each year.
In January 2018, the SBA introduced various changes, including the addition of a brand new loan: the SBA 504 loan. Let’s explore the fundamental changes to the SBA lending programs, as well as their wider impact on commercial loans.
Changes to SBA loans: benefits and disadvantages
1. Lower equity required for acquisition loans
This year, the SBA has slashed equity requirements down to 10%. Under the previous rules for acquisition loans, amounts over $500,000 required a 25% cash injection, while deals less than this amount called for 20% or more. Now, the SBA will let banks finance up to 90% of the deal, with just 10% equity coming from the buyer. 5% must be presented in the form of cash from the buyer, while the remaining 5% will be accepted in the form of a seller note.
Pros: This rule will make small business acquisition funding more accessible to first-time buyers.
Cons: It may make acquisition more competitive.
2. Aggregate financing for green energy projects
The SBA’s Green Energy Program encourages energy conservation with an increase in financing for projects committed to finding renewable energy sources. Renewable energy sources include solar power, wind power, geothermal, biomass, and hydropower. The SBA portion of the loan will increase from $5 million to $16.5 million, and there is no limit on total project cost.
Pros: This huge injection of funding will allow energy-focused businesses to fund multiple projects.
Cons: There are some strict requirements for borrowers. To qualify for funding from the Green Energy Program, you must meet one of the following criteria:
- You must plan to buy or construct a building that consumes 10% less energy than your current location
- You must be making upgrades to the building you own to consume 10% less energy than you currently use
- You must plan to buy or construct a building that produces fuel to reduce fossil fuel consumption or purchase equipment to do so at your current business location.
3. The Franchise Directory
The SBA’s Franchise Directory plans to speed up the loan approval process and make it more consistent. This means when once a franchise is found to be eligible for the 504 loan program for equipment loans or company acquisitions, it is added to the Franchise Directory, and no other review is needed. To be included in the Directory, you will need to meet Federal Trade Commission criteria.
If you are not listed as a franchise with the SBA, you can send your documents to the administration for a ruling. Alternatively, if you’re applying for a 504 loan, you can ask your CDC (Certified Development Company) to do so on your behalf.
Pros: Faster loan approval for applicants
Cons: Potentially more red tape due to Federal Trade Commission guidelines.
4. Seller standby rule extension
The SBA has extended the “seller standby rule” to the life of a loan from its previous term of 2 years. Under the new rule, the seller debt may not be considered part of the equity unless there has been no payment of principal interest for the duration of the SBA loan, which can be 10 years or more.
Pros: The full standby is only on the equity portion of the deal. This change means that an agreement can be structured with a second seller note, while the buyer makes payments to the seller starting on day 1.
Cons: It may be difficult for buyers to get sellers to agree to a 10-year standby period.
5. The 25-year SBA 504 Loan
A new loan option was introduced this year to help make loans more affordable for small businesses. The 504 loan program provides companies with the funding they need to grow, but with longer terms than the previous 10-20 year repayment periods. This new loan option has become increasingly popular with borrowers seeking smaller monthly payments spread out over a longer repayment term.
Like other SBA loans, rules dictate how a 504 loan can be spent. It may be used to finance:
- The purchasing of corporate land or buildings
- The construction of corporate buildings
- To purchase equipment with a service life of 10 years or more
- To improve, upgrade or renovate existing business properties
- To refinance conventional debt
Pros: The 504 loan offers longer repayment terms with more management monthly costs, meaning you can free up cash to spend on other areas of your business. Unlike conventional loans, the longer repayment term doesn’t mean higher interest rates for business loans.
Cons: The application process for a 504 loan is complex. While the SBA backs 40% of the loan, the remainder gets split between you and a private lender. Your bank or a CDC will provide 50% of the project total, and you will make a down payment of 10%. Due to the number of lenders involved, there is a vast amount of paperwork, and there are various eligibility criteria.
To find out if you can apply for an SBA 504 loan (and for information on how to apply for a small business loan) visit the SBA website.
There are certainly reasons for small business owners to feel optimistic these days. Small business lending has transformed the entrepreneurial landscape in the U.S., and it has never been easier or more affordable to get business loans.
According to a recent SBA Loan Performance Report, there has been a 20% surge in small business funding year-on-year since 2015. With the addition of new loan terms and the SBA 504, this number is expected to grow even higher thanks to streamlined loan applications and flexible equity standards. In other words, there has never been a better time to apply for an SBA loan.
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