Small Business Administration (SBA) loans make sense for many businesses, but before applying for one of your own, it’s important to know all the ins and outs to make the process as smooth as possible.
Earlier this year, the SBA implemented a number of key changes1 to its lending programs. Here is an overview of some of the most significant updates and what they could mean for you as a potential borrower.
Waived or discounted guarantee fees
Beginning October 1 of this year and lasting through September 30, 2024, the 7(a) loan program, which is the SBA’s primary lending mechanism, will waive all guarantee fees for loans of $1 million or less. These fees can be as high as 3.75% and are generally used to cover the government's cost when a borrower defaults on a loan. The SBA will also discount all guarantee fees for loans between $1 million and $2 million.
What this means for borrowers: If you have been thinking about taking out a loan to help your business, now is the time.
Faster process for seller notes
When purchasing a business, buyers sometimes turn to sellers to finance part of the transaction in the form of a seller note. Previously, seller notes had to be on full standby, meaning the seller was only paid back after the SBA loan was completely paid off. The seller is now allowed to be repaid after 24 months and can receive interest-only payments during the first 24 months if the business can afford the payments.
What this means for borrowers: This allows a borrower the opportunity to ask a seller to assist them in purchasing a business without requiring the seller to wait up to 10 years to be repaid.
Partial changes of ownership now allowed
It’s now possible to put a 7(a) loan toward a partial change of ownership. Previously, these loans could only be used as part of a complete business purchase or transition.
What this means for borrowers: The rule change provides a little more flexibility while allowing individuals to have an opportunity to partially buy into a business, when in the past they would have needed a personal loan.
Simplified underwriting for larger loans
The 7(a) program previously allowed for a simplified underwriting process for qualified loans of $350,000 or less. That limit has been raised to $500,000.
What this means for borrowers: The overall process is now more streamlined for a larger group of applicants, and funds may be available sooner in many cases. In addition, the SBA is no longer requires lenders to collect as much financial information as they used to, which should save all borrowers time as they work through the application process.
All in all, the changes have streamlined the SBA 7(a) program, which should be good news for potential borrowers. Because SBA loans often feature lower down payments and longer repayment terms, they are an attractive option to many business owners. Going forward, the simplified requirements will likely make the application process faster and easier, and allowing partial changes of ownership opens the door to a whole new pool of emerging entrepreneurs.
If you’re considering an SBA loan for your business, be sure to connect with an SBA Preferred Lender to get started.