The U.S. Small Business Administration Announces Changes to Its Flagship Programs

The U.S. Small Business Administration (SBA) has introduced important changes to its flagship 7(a) and 504 lending programs. These programs are designed to assist small business owners in obtaining the funds they need to start and expand their businesses.

Since April 2023, updates to the SBA’s lending criteria aim to simplify the process, increase access to SBA loans and provide better support to underserved communities, including women, minorities, veterans and rural entrepreneurs. It also expands access to capital by modernizing the programs.

Why the changes were announced

In making its announcements, the SBA noted that small business owners, especially those in underserved communities, struggle with accessing funding. In 2022, two out of three business owners who applied for credit did not obtain the funding they needed, according to one news release.1

Essentially, the SBA changes will allow more small business owners to access vital funding that will enable them to expand and grow their businesses. Additionally, it should now be easier for borrowers to find appropriate lenders, navigate the SBA loan process and be approved for any loans they’re eligible for. The SBA noted that the purpose of the changes was to “address persistent gaps in access to capital impacting small business owners in underserved communities.”1

1 www.sba.gov/article/2023/04/12/us-small-businessadministration-implements-rules-address-persistent-capital

Equity injection changes

Equity injection is any new cash or acceptable assets that are added to a project but were not on the borrower’s balance sheet before the equity injection. Startups no longer require equity injection based on SBA guidelines. The amount of equity needed will be determined by the bank’s internal credit policy.

In addition to these changes, the SBA announced it was reducing the documentation that lenders are required to collect to verify the borrower’s equity.

Partial changes of ownership

SBA loans can now be used for partial business acquisitions, allowing more flexible deal structures. Selling owners can remain involved in the business.

Affiliation consideration

The complex “control” element in determining affiliation has been removed. Affiliation will now be primarily based on ownership percentage, with 50% generally being the threshold. Lenders will only evaluate owner percentage, not control.

Personal resource test elimination

SBA lenders no longer need to assess the personal resources of loan applicants during the review process.

Simplified lending criteria for small loans

For loans under $500,000, the SBA has streamlined lending criteria, reducing the due diligence and documentation requirements. Lenders can consider

credit score, earnings or collateral when approving such loans. The SBA is allowing lenders to make loan decisions based on their existing policies for similarly sized non-SBA loans.

The SBA is also providing additional flexibility for loans under $150,000, reducing the cost and complexity of small-dollar lending. Because the paperwork will be streamlined, lenders can spend more time with applicants and less time on paperwork.

Simplified debt refinancing

The new guidelines make it easier for lenders to refinance both their own debt and the debt of other lenders.

Insurance requirements

Life insurance is no longer mandatory for 7(a) and 504 loans. The decision to use life insurance as collateral is now up to individual lenders.

What the changes mean for small business owners

These changes will make it easier for business owners to apply for loans and determine whether they’ve been approved. Business owners will also have more options for lenders when they apply for 7(a) and 504 loans, especially if they seek smaller loans.

For more about these changes, visit sba.gov/about-sba/sba-newsroom

Heritage Bank is a preferred SBA Lender, which means we can help borrowers get the funds they need faster than a bank that does not have that classification. Our experts will spend time with you and help you understand the right solution for your business. Acquiring SBA funding can be a long process, but to help your dream come true, it’s well worth the time. Learn more at heritagebanknw.com

CONTRIBUTOR: ROB STEWART

Rob’s banking career began as a file clerk and drive-up teller. He’s worked in retail banking, commercial banking and was CEO of a federal credit union for nine years. Now as our director of SBA lending, Rob leads, manages and oversees all aspects of the SBA department that offers a full suite of products and services to help small businesses succeed.