By Heidi K. Hoffman-Shalloo, Esq.

Persistent gaps in access to small business capital in underserved communities have prompted significant and far-reaching changes to the U.S. Small Business Administration’s (SBA) 7(a) and 504 lending programs this past May. In order to bolster lending equity in underserved markets and support the small business owner, a major driver of the economy, the current Administration has issued updates to both programs. These program changes are intended in part to provide rural, minority-owned, and women businesses with greater access to capital while streamlining program requirements. 

The bulk of the updates focus on the following: 

(i) expanding the number of lenders participating in the program to provide greater access to liquidity in underserved markets;
(ii) allowing lenders to use their existing credit policies for non-SBA loans of a similar size; 
(iii) eliminating the personal resource test; 
(iv) reducing certain requirements for loans under $150,000; 
(v) allowing partial changes of ownership to be financed; and 
(vi) amending the programs' affiliation standards to provide greater clarity.

This article will briefly address three of the most notable changes mentioned above. 

Allowing Financing of Partial Ownership Changes. Previously, in order for a change of ownership to be eligible for financing under the SBA lending programs, the change must have been a “complete” change of ownership. Now sellers can partially divest themselves of their ownership interests while remaining involved in the day-to day business operations as an officer, director, employee, or even key employee. This is a significant change to the program and will likely result in a new category of borrowers seeking financing. 

Amending Affiliation Standards. For a borrower to qualify for financing under the SBA lending programs, they must meet certain size standards to be deemed a small business. Under the old rules, management and control by another business, franchise and licensing agreements, and identity of interest were all considered in determining the size of a business. Now these affiliation “control” standards will no longer apply, and the rules will be limited to a more objective ownership standard. The lender will have to analyze the percent of ownership the applicant or business owns in another entity. Not only does this change streamline what was a complex affiliation analysis for lenders, but many franchises that did not qualify for financing under the prior rules may now be deemed eligible businesses. 

Elimination of the Personal Resource Test. SBA lenders no longer are required to analyze the personal resources of the applicant in determining eligibility. Previously, if an applicant had available liquid funds to finance the project, eligibility was called into question. Now lenders are no longer required to take into consideration such liquidity during the application process.

In light of banks tightening traditional credit and the new rules expansion of the existing programs, borrowers should consider the benefits of SBA’s lending programs in financing their next project. Our firm is uniquely qualified to assist borrowers in assessing their potential eligibility, given this firm’s extensive background in this highly specialized sector of the banking universe. We welcome all inquiries.

For more information, contact Heidi K. Hoffman-Shalloo at hkh@spsk.com or at (973) 540-8234.