Were You Aware Of The New SBA Loan Rules That Went Into Effect On August 1, 2023.
On May 11, 2023, crucial changes to the Small Business Administration’s (SBA) 7(a) and 504 loan programs went into effect. The SBA made these changes in order to streamlining the loan application process, expanding the number and types of lenders, and relaxing regulations in order to reach more small businesses, especially those in underserved communities.
These changes may offer relief to small businesses still struggling in the wake of the pandemic. However, there is backlash from many who believe the rules signify the end of the SBA’s prudent lending practices. Critics say these changes will increase defaults on the taxpayers’ dime.
The SBA has long served as a lender of last resort for small businesses that were unable to access loans through private lenders. The 7(a) loan is the SBA’s most popular loan program and has a maximum borrowing limit of $5 million. Loans can be used for real estate, equipment, acquisitions, and other working capital.
The 504 loan program is primarily used for real estate or land loans, with fixed interest rates and maturity up to 25 years and a maximum borrowing limit of $5.5 million. In the 2022 fiscal year, $25.7 billion in 7(a) loans and $9.2 billion in 504 loans were issued.
New SBA Loan Rules For 7(a) Loans
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Loan sizes. SBA has redefined Standard 7(a) loans as loans greater than $500,000. However, 7(a) small loans are those of $500,000 and less.
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Down payments. SBA considers down payments as equity injections. These requirements are also now subject to the lender’s discretion. However, in the case of a complete change of ownership, the loan requires a 10% down payment.
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Use cases. SBA loans can also now be used for partial changes of ownership.
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Interest rates. For variable rate loans, the maximum allowable rate range increased from the prime rate + 3% to the prime rate + 6.5%. However, interest rates vary based on the size of your loan and maturity no longer plays a factor. These rules apply to all types of 7(a) loans, with the exception of Export Working Capital Loans.
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Fees. Lenders can also now charge a flat fee of up to $2,500 on any SBA 7(a) loan.
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Collateral. SBA lenders are not required to take collateral for loans of $50,000 or less. The limit under the old guidelines was previously $25,000 or less. However, for loans of more than $50,000, lenders must use the collateral policies that they have in place for similarly-sized non-SBA commercial loans.
New SBA Loan Rules For 504 Loans:
- 504 loans are available through Certified Development Companies (CDCs). CDCs are SBA’s community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are also certified and regulated by SBA. The maximum loan amount for a 504 loan is $5.5 million. However, there are job creation requirements. You need to create or retain at least one job every $90,000 that the CDC lends. Small manufacturers must create/retain one job for every $140,000. These numbers increased from $65,000 and $100,000, respectively.
Both Loan Types:
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Personal resources. Previously, you had to show that funding was not available from your personal resources as part of the “credit not available elsewhere” qualification requirement. SBA lenders are not required to consider the personal liquidity of borrowers as part of their underwriting.