SBA Loan Changes 101: How Do They Impact Buying and Selling a Business in 2023?

Written by, The BizBuySell Team in Business Financing, Business Trends, Buying a Businesss, Franchising, Selling a Business

By Lauren Mauldwin, Christine McDannell, and Khaled Azar 

On May 10, the United States SBA (Small Business Administration) announced new updates to the SBA 7(a) and 504 programs.

Used properly, these can achieve massive leverage in an acquisition, making it easier to buy/invest in businesses or sell your current one. Since the full SBA Standard Operating Procedures are quite extensive, here's a simple snapshot of five key takeaways that are most relevant and how they can benefit you.

1. Permitting Partial Changes in Ownership

The SBA has lifted the requirement for a "complete" change in ownership of a business. As of May 11, 2023, they allow loans for partial ownership changes.

Why it matters: This is a big deal. Owners can now sell a portion of their stake in an entity while staying on as a part-owner or employee. Buyers, on the other hand, can expand their reach investing in businesses and get more creative with partial acquisitions. This also broadens opportunities for unique deal structures and succession planning loans.

2. Reduction of Insurance Requirements

The SBA is removing the requirement for hazard insurance on SBA loans up to $500,000 (although real estate is an exception). This is a notable shift from the original $150,000 - it means that loans under the $500K mark have fewer hoops to jump through.

Also, life insurance is no longer required for 7(a) or 504 loans.

Why it matters: This simplifies the loan process, removes barriers to entry and reduces paperwork.

3. Streamlined SBA Lending Criteria

The SBA has shaved down the criteria to qualify for loans under $500,000, making it much simpler than before. Now, there is less due diligence and required paperwork - letting individual lenders use their own process to determine whether an applicant is ‘creditworthy’.

SBA lenders can now use modern underwriting tools, including credit scoring, and can take the applicant’s income and collateral/assets into account when assessing the loan.

Why it matters: This helps move the underwriting process along more effectively, making it easier to access SBA loans.

4. Broader Affiliation Rules

The SBA is modifying affiliation rules for granting loans, making them less exclusionary. This is good news because their affiliation standards have been fairly extensive in the past, especially for small businesses - entities with ‘control’ over the business counted as ‘affiliated’.

Moving forward, lenders will not have to consider as many factors as ‘affiliation’. For example, they are no longer considering Common Management, Identity of Interest, and Franchise / License Agreements as affiliation. Instead, affiliation will be determined by a percentage of ownership of the entity - much simpler. Franchises were once excluded from SBA loans due to affiliation rules, but the new, broader rules will include them. 

Why it matters: This opens up opportunities for more businesses to access funding. Fewer restrictions have made the process more accessible.

5. Simpler Process for Injecting & Verifying Equity

Under the new changes, startup businesses no longer have an equity requirement - instead, this will be done on a case-by-case basis by each bank.

Buyers acquiring a pre-existing business will need to inject a minimum of 10% of the total acquisition. Seller-carried financing can also qualify here.

Why it matters: On both sides, lenders now have fewer requirements by the SBA and can use more of their own discretion/policies to determine equity.

In Conclusion:

It’s fair to say that a significant amount of red tape has been removed from the SBA loan process. This puts entrepreneurs in a better position than ever to sell and acquire businesses, with fewer limitations than before. 

The best part? By knowing these shifts, you can now get more creative in structuring deals to make them come together.