Are you looking to take the next step for your business but need growth capital? Have you been enduring high-interest loans and are now seeking to reduce the cost of financing? Are you evaluating acquisition capital options to fund the purchase of an existing business? If so, the SBA loan programs may be worthy of consideration.
The U.S. Small Business Administration (SBA) loan programs help small and mid-market business owners obtain financing to start or grow their companies. They have historically been known to have strict guidelines that make loan procurement process difficult or impossible. The SBA has recently updated its programs. This makes the process easier and the loans more accessible to businesses seeking funding for various needs.
7(a) and 504 SBA Loan Programs
The SBA offers two popular loan programs- the 7(a) and 504. The primary loan program is the 7(a) program. This loan is mainly used for financing equipment, inventory, and supply purchases, covering operating expenses, or refinancing debt. Additionally, the 504 loan program is typically for financing long-term fixed assets such as real estate or machinery. The SBA’s recent updates to these programs include increasing access to funds from a broader group of lenders, relaxing lending criteria, and streamlining lenders’ documentation and approval process.
Highlights of Key Changes
The SBA loan program updates make the programs more straightforward and accessible to businesses. Among the changes are:
- Access to Fund Elsewhere: The SBA only provides loans to businesses that are unable to secure conventional bank loans. Previously, lenders had to confirm that applicants could not obtain a loan from a non-government source, including from their personal resources. This requirement precluded businesses with funding available through personal channels from qualifying for an SBA loan. With the new changes, personal resources are no longer a factor in whether credit is available elsewhere. As a result, more businesses can qualify for the SBA loan.
- Partial Changes of Ownership: Previously, 7(a) loans were only available for those looking to acquire 100% ownership of a business. Individuals seeking funding for a partial business acquisition were not eligible. As of May 2023, loans for partial change of ownership are permitted. This change allows more entrepreneurs looking to buy into existing businesses the option to use a SBA loan for financing.
- Collateral Requirements: The SBA also updated its collateral requirements for some 7(a) loans. Previously, only loans of $25,000 or less did not require collateral. The SBA increased this threshold to $50,000, allowing borrowers access to higher loan amounts without collateral. However, the requirement for personal guarantees remains.
- Equity Injection Requirements: The SBA’s rigorous equity injection requirements previously precluded some first-time buyers from obtaining a loan. An equity injection of 10% was mandatory for start-up businesses and complete ownership changes for 7(a) loans of $500,000 or less. The SBA eliminated this requirement for loans of $500,000 or less, allowing lenders more flexibility to follow their policies for similar private-sector loans. For 7(a) loans for more than $500,000, a 10% equity injection is only required for complete changes in ownership.
- SBA Eligibility Determination: Instead of making lenders responsible for determining program eligibility, the SBA will now make all determinations using new technology. Lastly, this update reduces the work for lenders so they can help more borrowers and streamline the loan process.
Benefits of Changes
As business owners, one of the many challenges you may face is finding funding for your business. The SBA’s recent loan program updates aim to ease the challenge of obtaining financing by making loans more accessible and the application process easier. If your business did not qualify for a SBA loan in the past, or if you are evaluating SBA options for the first time, you should review the new guidelines to see if you are eligible.
Sabre Financial Group Can Help
Our team has extensive experience assisting many companies looking to expand and secure financing and capital essential to their business goals. Our financial experts know how the loan process works and will help you find a lender that best meets your needs. We can also help you after the loan has been secured by managing your financial department on an interim or fractional basis. Reach out to schedule an initial consultation. In just a few minutes via phone or email, we can advise on whether we can assist you with your business goals.