LOANOLOGY
RECENT SBA RULE CHANGES
SOP 50 10 7
No Personal Property Collateral for Loans Under $500,000
The U.S. Small Business Administration (SBA) has implemented a landmark change in its Standard 7(a) loan program through Procedural Notice 5000-847027 and SOP 50 10 7. This new rule eliminates the requirement for personal property collateral for loans under $500,000, significantly simplifying the financing process for small businesses.
The Key Update: Highlighting Residential Property Restrictions
One of the most significant changes introduced by SOP 50 10 7 pertains to residential property as collateral for SBA loans exceeding $500,000. Here's what you need to know:
$500,000 Minimum Loan Threshold: Residential property, such as your primary residence or vacation home, cannot be used as collateral for SBA loans below $500,000. This new restriction aims to mitigate risk and streamline the loan approval process for smaller loan amounts.
25% Equity Requirement: If you wish to use residential property as collateral for loans exceeding $500,000, you must have a minimum of 25% equity in the property. This ensures that the lender has enough cushion in case of a potential default and foreclosure.
15% Value Deduction: Additionally, SBA lenders are now instructed to deduct 15% from the appraised value of the residential property before calculating the loan-to-value (LTV) ratio. This further reduces the lender's potential risk exposure.
Partial Equity Acquisitions Now Eligible for SBA Loans
In an evolving business landscape, the Small Business Administration (SBA) has introduced progressive changes to its loan policies. These revisions include allowing loans for partial changes of ownership, a novel concept that has the potential to revolutionize traditional business acquisition models.
What is Partial Equity Acquisition?
Partial Equity Acquisition refers to the practice of purchasing less than 100% of the equity in an existing business. This approach allows for a more flexible business transition strategy where complete ownership change is not required.
SBA's New Approach: Loans for Partial Ownership Changes
The SBA, traditionally known for facilitating complete business acquisitions, has expanded its scope to include partial business acquisitions. This change has unlocked exciting possibilities for deal structures that can yield benefits for all parties involved.
Under this new policy, the selling owner is permitted to maintain a role in the day-to-day operations of the business. This role could range from an officer or director position to being a key employee or even a regular staff member.
Implications of the New SBA Guidance (SOP 50 10 7)
Effective from August 1, 2023, the Standard Operating Procedure (SOP) 50 10 7 provides the comprehensive details of SBA's policy on partial equity acquisitions.
Key Highlights of the New Guidance
Partial Equity Acquisitions: The SBA now recognizes and allows partial equity acquisitions. This flexibility means that interested buyers can acquire a share of an existing business without needing to purchase the entire organization.
Eligibility Requirements: For a buyer to qualify for an SBA loan financing a partial equity acquisition, they must acquire at least 20% ownership interest in the business. Simultaneously, the existing owner(s) need to retain a minimum of 20% ownership interest in the business.
Equity Injection Requirements: The equity injection requirement for partial equity acquisitions is waived if the new owner contributes at least 50% of the equity in the business.
Guaranty Requirements: All owners holding 20% or more of the business must provide a full, unlimited guarantee for any SBA loan financing the business's purchase. This requirement applies regardless of whether it is a complete or partial partner buyout.
Benefits of the New Guidance
The shift in SBA's policy is a positive development for small businesses seeking growth and expansion. It simplifies access to capital and makes partial equity acquisitions an attractive option for businesses that prefer gradual ownership transition or partnering with new investors.
Guaranty Requirements for Partial Partner Buyouts
The SBA requires that all owners with a 20% or more stake in the business provide a full, unlimited guarantee for any loan used to finance the business's purchase. This requirement extends to both complete and partial partner buyouts.
In the event of a partial partner buyout, the remaining sellers who retain at least 20% ownership of the business must provide a full, unlimited guarantee for the SBA loan. This requirement stems from their continued significant stake in the business and shared responsibility for its success.
SBA's new loan policy for partial equity acquisitions opens up a world of opportunity for small businesses. This approach facilitates smoother transitions, promotes gradual ownership changes, and encourages new partnerships, leading to greater flexibility and potential growth for businesses.
Spousal Guaranty Requirements for SBA Loans
The new SBA SOP has broadened the scenarios under which a spouse may be required to act as a guarantor. Here are some examples:
Spousal Guaranty Rule
For SBA loans, if a spouse of an owner owns any percentage, and the spouse equity and the owner equity combined equals 20% or more, the spouse also has to be a guarantor. So, if an owner has 19% equity and their spouse has 1% equity then both must be guarantors.
Community Property or Spousal Interest in Property
f a spouse has a community property or spousal interest in property that is pledged to secure an SBA loan, they may need to guarantee the loan. This requirement is due to community property laws which give spouses an equal ownership interest in property acquired during marriage and spousal interests that allow spouses to inherit property from each other.
Significant Influence Over Business Operations
A spouse may be required to be a guarantor if they exert significant influence over the business's operations, even without a direct ownership interest in the business. For instance, if the spouse manages the business's finances or makes major decisions for the business, the SBA may consider them a de facto owner and require a guaranty.
Prior Bankruptcy or Credit Issues
If the spouse has a history of bankruptcy or credit problems, the SBA may require a guaranty. This is because SBA considers a spouse's creditworthiness when evaluating the overall risk of the loan. If the spouse's credit history indicates higher risk of default, the SBA may require their guaranty to mitigate that risk.
Limited or No Community Property Laws
In certain states with limited or no community property laws, spouses may still be required to be guarantors if they have a significant financial interest in the business or have contributed to the business's success in some way. For example, if a spouse has invested personal funds into the business or provided valuable labor or expertise, the SBA may require their guaranty.
Borderline Approval Scenario
For less established borrowers whose loan is borderline for approval, a spouse who generates income can be added as a guarantor to help push the loan over the approval line with the lender.
Supplemental Guarantor: Updated Definitions
Added language indicates that a non-owner spouse required to provide a limited guaranty to secure a lien on jointly owned personal real estate is not a Supplemental Guarantor. This clarification is important as such a guaranty is mandatory, and Supplemental Guarantors are typically only required for voluntary guarantees.
For instance, if a business owner is obtaining an SBA loan to finance the purchase of a portion of their business partner's ownership stake, and the business owner's spouse is required to provide a limited guaranty to secure a lien on the couple's jointly owned home, the spouse is not considered a Supplemental Guarantor. This distinction is significant because Supplemental Guarantors are typically subject to stricter eligibility requirements and may be required to provide a personal financial statement.
A Look at SBA Fee Changes (SOP 50 10 7 vs. 50 10 6)
With the recent update to the Standard Operating Procedure (SOP) 50 10 7.1, several fee structures have shifted compared to the previous SOP 50 10 6. So, what went up, what went down, and what stayed the same?
Upward Adjustments:
Guarantee Fee: This fee, based on a percentage of the guaranteed loan amount, saw a slight increase across most loan sizes. For example, loans between $150,000 and $500,000 now incur a 2.75% fee, compared to 2.25% previously. For loans exceeding $2 million, the new SOP introduces a 3.50% fee for the guaranteed portion exceeding $1 million, while the old SOP capped it at 3.25%.
Collateral Registry Fee: This fee, applicable to loans exceeding $150,000 with specific types of collateral, doubled from 0.125% to 0.25%.
Variable Rate Loan Spread: The spread for variable rate SBA loans jumped from 2.75% to 3% in the new SOP.
Downward Adjustments:
Servicing Fee: This fee, charged annually for servicing the guaranteed portion of the loan, experienced a welcome decrease for some loan sizes. Loans below $1 million now have a 0.25% servicing fee, down from 0.50%.
Packaging Fee: The fee associated with packaging SBA loans for secondary market sale is now waived for loans under $10 million, offering cost savings for smaller businesses.
Some fees remained unchanged for consistent planning:
Line of Credit Annual Fee: This fee for SBA lines of credit continues at 0.50% of the committed line amount.
Disaster Loan Processing Fee: This fee remains at 3% of the loan amount for approved disaster loans.
New Maximum Interest Rates Allowed for SBA 7(a) Program
SBA 7(a) Variable Loan Rate Maximums
The interest rates for 7(a) loans vary based on the loan amount, as per the following breakdown:
$50,000 or less: The maximum spread is 6.5% resulting in a current max rate of 15.00%.
$50,001 to $250,000: The maximum spread is 6% resulting in a current max rate of 14.50%.
$250,001 to $350,000: The maximum spread is 4.5% resulting in a current max rate of 13.00%.
Over $350,000: The maximum spread is 3% resulting in a current max rate of 11.5%.
Please note that these rates are current as of October 2023, calculated with the current prime rate of 8.50%. It's also important to keep in mind that these interest rates are maximum rates. The actual rates may vary and average less.
Maximum Interest Rates Allowed for SBA 7(a) Small and SBA Express Loans
For 7(a) Small and SBA Express loans, the maximum interest rates allowed are determined by the loan amount and whether the interest rate is fixed or variable. The interest rates are as follows:
Loans $50,000 or less: These loans cannot exceed the Prime or SBA Optional Peg Rate + 6.5%. Whether the rate is fixed or variable, it is subject to this maximum limit.
Loans $50,001 up to and including $250,000: For these loans, the highest permissible interest rate is the Prime or SBA Optional Peg Rate + 6.0%.
Loans $250,001 up to and including $350,000: The maximum allowable interest rate for these loans is the Prime or SBA Optional Peg Rate + 4.5%.
Loans $350,001 up to and including $500,000: The interest rate for these loans cannot exceed the Prime or SBA Optional Peg Rate + 3.0%.
These interest rates are designed to facilitate borrowing for small businesses while ensuring that the cost of borrowing remains within reasonable limits. Please remember that these are the maximum interest rates, and the actual rates may vary depending on multiple factors such as the borrower's creditworthiness, loan term, and overall risk profile of the loan.
Maximum Interest Rates Allowed for 7(a) CAPLines
The interest rates for the 7(a) CAPLines are determined by the loan amount and whether the interest rate is fixed or variable. The maximum allowable interest rates are as follows:
Loans $50,000 or less: For these loans, the maximum interest rate cannot exceed the published maximum allowable fixed rate or, if variable, the Prime or SBA Optional Peg Rate + 6.5%.
Loans $50,001 up to and including $250,000: These loans cannot exceed the published maximum allowable fixed rate or, if variable, the Prime or SBA Optional Peg Rate + 6.0%.
Loans $250,001 up to and including $350,000: For these loans, the highest permissible interest rate is the published maximum allowable fixed rate or, if variable, the Prime or SBA Optional Peg Rate + 4.5%.
Loans $350,001 and greater: The interest rate for these loans cannot exceed the published maximum allowable fixed rate or, if variable, the Prime or SBA Optional Peg Rate + 3.0%.
Remember, these are maximum rates, actual rates may be lower depending on various factors including the borrower's creditworthiness, loan term, and overall risk profile of the loan.
SBA Unleashes No Guaranty Fees Below $1 Million
The U.S. Small Business Administration (SBA) has shaken up the lending landscape with a new fee policy. Effective October 1, 2023, – guaranty fees are waived for all 7(a) loans under $1 million.
No More Hurdles, Just Access:
Previously, SBA 7(a) loans, a crucial lifeline for many small businesses, carried guaranty fees ranging from 0.45% to 3.75% of the guaranteed portion of the loan. For smaller loans, these fees could create a significant financial hurdle, discouraging entrepreneurs from seeking the capital they need.
The Power of Zero:
Under the new policy, a business securing a $999,999 SBA loan no longer faces any upfront guaranty fees, saving them thousands of dollars. This frees up valuable resources for vital business needs, like equipment, inventory, or marketing, paving the way for stronger investment and growth.
A Tale of Two Loans:
Let's compare the impact of the new policy with a concrete example:
Scenario 1: Pre-October 1, 2023
A bakery secures a $1 million SBA loan with a 10-year maturity.
The SBA guaranty fee stands at 3.50% of the guaranteed portion ($1 million).
Total upfront guaranty fee: $35,000
Scenario 2: Post-October 1, 2023
The same bakery seeks a $1 million loan under the new policy.
Since the loan amount falls below $1 million, the guaranty fee is waived entirely.
The bakery saves a staggering $35,000 upfront, boosting their available capital for equipment upgrades, hiring new staff, or launching a new product line.
The "Do What You Do" Emphasis to Lenders in New SBA SOP
Comparing the Landscape:
By quantifying the difference, we can see the clear shift:
Keyword mentions: "Do what you do" and similar phrases appear 6 times more often in the new SOP.
Contextual emphasis: The new SOP heavily promotes lender autonomy throughout, while the old one focused on adhering to SBA guidelines.
Delegated responsibilities: The new SOP grants lenders greater discretion in several key areas, compared to the more limited autonomy in the old one.
Old SOP: Compliance over Autonomy:
While the old SOP (50 10 6) acknowledged lender expertise, its primary focus was on adhering to specific SBA regulations and procedures for underwriting and approving loans. This manifested in several ways:
Emphasis on SBA guidelines: The document extensively detailed SBA requirements for various aspects of the loan process, leaving less room for lender discretion.
Limited autonomy: While some sections allowed for lender judgment within established frameworks, the overall tone emphasized compliance with SBA regulations.
Scattered references: Mentions of utilizing lender practices were infrequent and often accompanied by references to specific SBA requirements.
New SOP: Empowering Lenders with "Do What You Do" Trust:
The new SOP (50 10 7.1) marks a significant departure, placing greater trust in lenders' judgment and expertise. This "do what you do" approach is evident through:
Prominent mentions: The phrase "do what you do" or its variations appear significantly more frequently, directly highlighting the shift in emphasis.
Delegated responsibilities: The new SOP grants lenders greater discretion in areas like collateral sufficiency, ownership verification, and fraud detection.
Reliance on established practices: Lenders are encouraged to apply their own established underwriting standards and procedures, similar to those for non-SBA loans.
The Rise and Fall of the SBA Franchise Directory
The SBA Franchise Directory, once a seemingly invaluable resource for both lenders and potential franchisees, experienced a dramatic fall from grace in 2023. This article explores its history, purpose, demise, and the lingering ramifications of its disappearance.
What was the SBA Franchise Directory?
Established in 2018, the directory aimed to streamline the loan approval process for franchise businesses seeking SBA financing. It was a list of pre-vetted franchise brands deemed eligible for SBA loans based on their financial stability, business model, and compliance with SBA regulations. This supposedly saved lenders time and resources by providing a readily available pool of qualified borrowers.
What did the directory do?
Simplified loan eligibility: For lenders, the directory provided a reference point for quickly assessing franchise loan eligibility, reducing the need for extensive due diligence on each individual brand.
Offered confidence to franchisees: Potential franchisees seeking SBA loans could see their chosen brand listed in the directory, offering a sense of assurance and potentially speeding up the loan application process.
Promoted transparency: The directory aimed to increase transparency in the franchise lending landscape, potentially encouraging lenders to offer more competitive terms for listed brands.
Why is it no longer around?
The SBA Franchise Directory faced several challenges and criticisms:
Limited scope: The directory only included a fraction of all existing franchises, potentially disadvantaging those not listed.
Lack of objectivity: Concerns arose about potential bias in the selection process, with some questioning the criteria for inclusion and the potential for favoritism.
Regulatory concerns: Some argued that the directory overstepped the SBA's regulatory role by effectively endorsing specific franchises.
Ineffectiveness in increasing loan approvals: Critics claimed the directory didn't significantly increase the number of approved franchise loans, making its existence questionable.
In October 2023, after months of public debate and legal challenges, the SBA ultimately decided to abolish the Franchise Directory.
Ramifications of the directory's demise:
The directory's disappearance has left a gap in the franchise lending landscape:
Increased due diligence: Lenders now need to conduct more in-depth due diligence on individual franchise brands, potentially slowing down the loan approval process.
Uncertainty for franchisees: Potential franchisees may face more difficulty securing SBA loans without the assurance of a pre-vetted directory.
Shifting focus: The emphasis might shift back to traditional lending criteria, potentially disadvantaging newer or smaller franchise brands.
Impact on banks:
Increased workload: Banks now have to invest more time and resources into researching and determining the compliance of individual franchise brands for each loan application. This can lead to longer processing times and potentially stricter lending criteria for franchise businesses.
Greater reliance on external resources: Banks may turn to franchise associations, industry experts, or third-party research firms to assess franchise compliance. This can add additional costs to the loan process.
Potential for inconsistent application of standards: Different banks may have different interpretations of what constitutes a compliant franchise, leading to potential inconsistencies in the loan approval process across different lenders.
Impact on franchise businesses:
Potential for stricter loan requirements: With banks conducting their own franchise compliance assessments, some franchisees might face stricter loan requirements or higher interest rates, especially for franchises with less established track records or perceived higher risks.
Increased importance of franchise reputation: A franchise's brand reputation, financial stability, and compliance with regulations become even more crucial in securing financing.
Need for transparency and documentation: Franchisees should ensure they have readily available documentation and information about their chosen franchise to facilitate the bank's compliance assessment.
Overall, the discontinuation of the SBA's Franchise Directory adds complexity to the loan approval process for franchise businesses. The SBA Franchise Directory's story serves as a reminder of the need for careful consideration and ongoing evaluation of any policy or initiative aimed at streamlining complex financial processes.
While its initial purpose was noble, unforeseen challenges and potential biases ultimately led to its demise. Moving forward, the franchise lending landscape needs to prioritize transparency, data-driven decision-making, and collaborative efforts to ensure responsible and equitable access to capital for qualified franchise businesses.
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