SBA Lending - The New Standard Operating Procedure Updated
As of August 1st, 2023 the new Standard Operating Procedure (“SOP”) for SBA lending (Small Business Administration Loan Programs) went into effect, and there was a further update that went into effect on 11/15/23 that further clarified many of the changes already included in the August update. Below is a summary of some of the largest and most impactful changes to the program guidelines.
You can now do partial buyouts of businesses and sellers can stay in the business indefinitely. However, one key feature of these partial buyouts is that the buyer must be buying the stock or membership in the existing company. You cannot do an asset purchase under the partial buyouts. Instead, the seller keeps a percentage of the existing equity and the buyer acquires whatever percentage of the equity they are looking to acquire. There is no minimum stated in the SBA SOP of the percentage of the company someone must buy, but I think most lenders will want the loan to be $350,000 or higher to be worth the paperwork.
On a partial buy-out anyone who has a 20% or greater ownership interest in the selling company post-closing will be required to sign a personal guarantee. This includes any seller if their individual ownership is 20% or greater. In addition, if the loan is not fully secured by business assets, then all guarantors, including the seller(s), would be required to pledge equity in personal assets to shore up the collateral position if they have any such assets.
There is no equity required by the SBA on partial business buyouts if the balance sheet of the seller is at a 9 to 1 debt to worth ratio in the year-end and quarter-end prior to closing. However, this does not mean lenders will not require equity down even if these ratios are met. If those ratios are not met, the equity to be required down by the SBA is 10% and is based on the percentage of the business being acquired.
If you operate a company now and are buying another company that is in the same NACIS code as your existing business, you can finance 100% of the business purchase via an SBA 7A loan. Some lenders were doing this prior to the new SOP, but the new SOP makes this a standard rule.
If you are buying out other owners in a company where you are already an owner, you have to have been an owner for the last 24 months. No equity is required if the balance sheet meets a 9 to 1 debt to worth ratio in the year-end and quarter-end prior to closing. If that condition is not met, then an equity injection of 10% is required by the SBA on the buy-out.
Seller debt can now be used as equity in both full and partial business acquisitions based on the new SBA rules if the seller note is on full standby for at least 24-months. The minimum equity requirement of 10% has not changed. However, this new rule means you can technically finance 100% of the business acquisition via the SBA loan and with a 10%seller note on standby for only 24-months. If the standby seller note requires interest payments during the first 24 months, then the new rule states the buyer must put down at least 2.5% equity and then the seller note can still count for the other 7.5% of the normally required 10% equity. Keep in mind, with the higher level of financing and the seller notes in place, the debt will still need to hit normal qualifying debt service coverage ratios for this type of financing to be allowed. However, we are still seeing most lenders require a minimum of 5% down from most Borrowers even if there is a seller note on full standby for two years for 10% of the loan amount.
Technically no equity is required for a start-up business under the new SOP.
The definition of "Affiliate Businesses" for SBA purposes has changed. This does not reduce related SBA exposure you have on any other transactions you have guaranteed, but now if you have less than a 50% ownership in other businesses the lender is no longer required by the SBA to get the financial statements on those entities and include them in the SBA underwriting.
The SBA franchise directory has gone away so Banks can make their own determinations as to what franchises they will lend to. Before this change all franchise loans could only be made to approved SBA franchises.
The Personal Resource Test is changing. Under the old test if any Guarantor had substantial liquidity (usually more than the loan amount), the loan would not pass the test and would be ineligible for SBA financing. That test is going away and lenders now have the ability to do a standard “Credit Elsewhere” test where they determine if the loan would readily qualify for standard commercial loans, which is a test required on all SBA 7A loans to begin with. If the loans does not qualify for “Credit Elsewhere”, then they can still make the loan regardless of the liquidity of any one guarantor.
If you would like to learn more about SBA loans or see if there is a product that would be a good fit for you, please just reach out to us at any time at 630-988-4852 or at brad@commerciallendingx.com.