Our monthly team meeting in August was used to review some of the changes made to the Small Business Administration Loan rules. One of the bankers who assists us in SBA loans came in to discuss and highlight some of the changes made that will help a buyer with funding for a business transaction.
Below are some of the revisions in the SBA procedures that went into effect on August 1, 2023.
- Equity requirements remain at a minimum of 10% of total project costs* for business acquisitions financing which is NOT a change, but the terms by which Seller Financing can count as equity have broadened. Seller Debt under the following terms can now count toward required equity:
- It is on full standby for the first 24 months of the 7(a) loan or
- A debt that is on partial standby (interest payments only being made) may be considered equity when there is historical business cash flow available to make payments, and at least a quarter of the SBA-required equity injection is from a source other than the seller.
* project costs are the purchase price of the business plus any extra cash for the running of the business
- Under the new SOP, equity must be new cash, meaning “not on the Applicant’s Balance Sheet prior to the equity injection.” Under this rule, a business could not use cash on its balance sheet to acquire another business.
- SBA financing for a partial change of business ownership (less than 100%) is now allowed.
- Business and individual owner(s) acquiring the ownership interest must be co-borrowers on the debt.
- The seller may stay on as an owner, office, director, stockholder, Key Employee, or employee of the business.
- 20% or greater owners of the entity post-closing must provide an unlimited personal guarantee.
- Affiliation threshold generally increased to 50% ownership (was always 20%) – Exception is if no one owns 50% or more, then the threshold is 20%
- Guarantor affiliation now includes consideration of each businesses’ 3 digit NAICS subsector.
- The principal of control has been removed from affiliation consideration.
Since these changes just happened on August 1, SBA lenders are still pending further clarification and technical updates from the SBA regarding these modifications.
Click for full list from the SBA.gov website