The U.S. Small Business Administration (SBA) updated its policies and procedures for the SBA loan programs through a new Standard Operating Procedure (SOP 50 10 7) that went into effect on August 1, 2023. The new SOP includes changes to the amount of paperwork required for programs, time to approval and closing, as well as eligibility.
In this summary of the SOP changes, you’ll see how the new rules make the programs available to even more small business owners that need financing to grow and thrive.
What changes are included in SBA SOP 50 10 7?
The new SBA SOP has three major benefits for small business owners and lenders:
- The SBA application is easier for small business owners to complete
- Updated requirements make it faster for lenders to underwrite and close loans, and
- The overall changes make the program more expansive and available to a wider range of small business owners
Here’s a summary of the most impactful updates and how they’ll impact lenders and business owners.
Affiliation
Many entrepreneurs have ownership in multiple businesses. When they apply for financing for one business, it’s likely that they’ll need to submit information on their other businesses or affiliates.
The SBA requires lenders to collect tax returns and analyze financial performance of the borrower and “affiliated” entities, so the definition of “affiliation” has a significant impact on the speed and complexity of the application process.
SBA has eliminated the issue of control, franchise, license, and identity-of-interest as determinants for affiliation. Instead, lenders can rely on ownership percentage and common industry classification for affiliation going forward.
This means that many borrowers will submit less paperwork and the lender won’t need to analyze as many entities as they consider the loan.
Per Chris Levy, President & CEO of Pursuit, “while the review of affiliated information is well intended to make sure businesses are small enough to qualify for SBA assistance, the reality is it forced the borrower to provide a lot of documentation that was less relevant to the loan request and forced the lender to spend a lot of time collecting and analyzing that documentation. The new rules will simplify and speed up the application process. For example, a recently approved loan that had 18 affiliated entities under the old rules would only have 4 affiliated entities under the new rules.”
Streamlined underwriting guidelines
The new SOP further streamlines the application process by delegating more of the loan decision to the lenders themselves.
Lenders can now follow their own credit policies to approve and close SBA 7(a) loans up to $500,000. This should make it faster and easier for businesses to receive smaller SBA 7(a) loans from qualified lenders.
Funding partial changes of ownership
Previous SBA rules on SBA loans for business acquisition required the loan to fund the purchase of the entire business. The new rules allow an SBA loan to be used to fund a partial change of ownership, giving business owners an opportunity to gradually purchase the business over time.
This will make the SBA program available to more businesses. Business owners can apply for a more manageable amount of debt to buy-into the business. It can also make it easier to transfer ownership by allowing the seller to train and acclimate the new owner before fully selling the business.
Character determinations
As part of the loan application process, SBA clarifies that a business owner can’t be incarcerated, on parole or under indictment for a felony or crime involving financial misconduct or a false statement.
Previous rules required business owners to detail prior arrest records for their entire adult life. Gathering and describing these offenses was time consuming and, in many cases, not relevant to the loan request. This should make the application process easier for the small business applicant and make the loan request faster for the lender to process.
Credit elsewhere
SBA loans require the borrower to demonstrate a need for SBA loans, otherwise known as the “credit elsewhere” requirement.
SBA lenders are no longer required to consider the personal resources of business owners for credit elsewhere determination. Even if a borrower has significant personal resources, that doesn’t necessarily mean that they don’t need an SBA loan for their business. This will expand the availability of the SBA programs to more small businesses.
Pursuit is a national leader in SBA lending
Pursuit sees great opportunity for lenders and business owners with the new SBA SOP. Lenders can offer more financial support to more small businesses which, in turn, creates more jobs and improve communities.
With more than 65 years of experience in SBA lending, the Pursuit team can work with you and your business clients to better understand the SOP changes and how they’ll impact your work together. We offer more than 15 different business loan programs, including SBA loan programs, and can work with you to get the best deal possible for you and your client. Get in touch with us today to learn more.
