SBA Improves Lending Program
Small Business Administration Announces Loan Program Improvements to Expand Access to Capital and Facilitate Partial Changes of Ownership
The U.S. Small Business Administration (SBA) announced on August 1, 2023, a number of improvements to its loan programs, including the 7(a) working capital and 504 fixed asset loan programs. These changes are designed to make it easier for small businesses to obtain the capital they need to grow and create jobs, and to facilitate partial changes of ownership. One of the key changes is the expansion of simplified underwriting for loans of $500,000 or less. Under simplified underwriting, lenders can use a variety of factors to assess a borrower’s creditworthiness, including cash flow analysis, credit scores, and the borrower’s own financial statements. This will make it easier for small businesses with limited credit histories or other challenges to obtain financing. The SBA also announced that it is increasing the maximum loan amount for the 504 loan program from $5 million to $10 million. This will make it possible for small businesses to finance larger projects, such as the purchase of commercial real estate or equipment. In addition, the SBA is making it easier for small businesses to obtain loans in underserved areas. The agency is expanding its partnerships with community lenders and providing more technical assistance to borrowers. The SBA also revised its rules to allow SBA loans to be used to finance partial changes of ownership. This change was made to make it easier for small businesses to obtain financing and to provide more flexible succession planning options for business owners. A partial change of ownership is when a new owner acquires a portion of an existing business’s ownership interest. This can happen for a variety of reasons, such as when a business owner wants to retire and bring in new partners, or when a new investor wants to acquire a stake in a business. There are a few requirements that must be met for an SBA loan to be used to finance a partial change of ownership. First, the new owner must be a co-borrower on the loan. Second, the business must have a debt-to-worth ratio of no greater than 9:1. Third, the seller must inject at least 10% of the purchase price in cash if the business does not meet the debt-to-worth requirement. There are a number of benefits to using an SBA loan to finance a partial change of ownership. First, the SBA loan can provide the new owner with the capital they need to acquire a stake in the business. Second, the SBA loan can help to reduce the risk for the new owner by requiring the seller to inject cash into the business. Third, the SBA loan can provide the new owner with access to technical assistance and counseling from the SBA. If you are considering a partial change of ownership for your business, you should contact your local SBA office to learn more about the SBA loan program and the requirements for financing a partial change of ownership. Here are some additional things to keep in mind when considering a partial change of ownership:
Make sure you have a clear understanding of the seller’s intentions for the business. Do they plan to remain involved in the day-to-day operations? Do they plan to sell their remaining ownership interest in the future?
Get professional advice from an attorney and accountant to ensure that the transaction is structured in a way that is beneficial to both you and the seller.
Be prepared to put in the work to make the partial change of ownership a success. This may involve working closely with the seller to transition the business, as well as developing a new strategic plan for the business.
A partial change of ownership can be a great way to grow your business and bring in new talent and ideas. However, it is important to do your due diligence and plan carefully before making the move.