Here's What the New SBA Loan Rules Mean for Your Small Business

The U.S. Small Business Administration is anxious about small businesses in underserved markets facing difficulties in getting loans from the SBA.

On May 11 and 12, the SBA made changes to their programs to make it easier for lenders to participate, allow nonprofit lenders through Community Advantage to provide more opportunities, and simplify the documentation process for evaluating loans.

According to Isabella Casillas Guzman, the U.S. Small Business Administrator, these updates will modernize and expand the SBA's lending programs. This will benefit communities that have been historically overlooked, giving them better access to funding for creating jobs and growing the economy.

The new rules aim to make it easier for minority-, veteran-, and women-owned businesses to obtain government-backed small business loans.

What Are the New Changes in the SBA Rule?

The U.S. Small Business Administration (SBA) has implemented new rule changes that will have significant impacts on their loan programs. These changes were finalized in April and are set to be effective in May. Let's take a closer look at these major changes:

• Affiliations and Lending Criteria

The first rule change focuses on SBA affiliations and lending conditions. It was issued in the Federal Register on April 10, 2023. This change aims to revise the regulations related to SBA affiliations and establish new criteria for evaluating loan applications.

• Moratorium on Licensing New Small Business Lending Companies

The second rule change, published in the Federal Register on April 12, 2023, addresses the moratorium on licensing new Small Business Lending Companies (SBLCs). The SBA has made changes to this moratorium, which will impact the licensing process for SBLCs.

One significant change resulting from these rule revisions is the expansion of non-bank lenders eligible to apply for an SBLC license. Previously, only a limited number of non-depository institutions, such as banks and credit unions, could offer SBA 7(a) loans.

SBLCs were required to purchase one of the 14 existing licenses from another SBLC to participate in the program. However, the SBA has decided to lift this cap and allow new financial companies, including fintech, to apply for an SBLC license.

While the SBA plans to initially add only three new SBLCs, the removal of the license cap is expected to increase access to affordable loans. The SBA estimates that a newly licensed SBLC could issue approximately 425 new loans over the next four years. This change is particularly beneficial for small and underserved businesses, as it expands the pool of lenders and provides more opportunities to secure capital.

Fintech company Funding Circle has expressed support for these changes, as they believe it will help enhance access to capital for America's underserved and smallest businesses. The SBA's efforts to expand the number of SBLCs and include fintech are aimed at promoting economic growth and supporting the financing needs of diverse businesses across the country.

The Addition of Community Advantage Lenders

The U.S. Small Business Administration (SBA) is introducing a new category of lenders called Community Advantage lenders. This initiative aims to support nonprofits and mission-oriented lenders that may not meet the typical qualifications for SBA lending. Community Advantage lenders focus on providing assistance to underserved markets, including startups, businesses owned by veterans and women, as well as serving rural and low-income communities.

Currently, both for-profit and nonprofit Community Advantage lenders are involved in offering SBA loans to business owners in underserved markets. However, these lenders have been operating under the Community Advantage pilot program, which has a limited duration and is scheduled to conclude in 2024.

As part of the SBA's efforts to establish a more permanent solution, lenders who are currently participating in the pilot program will transition into the new program. This transition will involve receiving a non-temporary license, allowing them to continue their operations without an expiration date.

While existing lenders in the pilot program can be either for-profit or nonprofit organizations, new applicants seeking to participate in the Community Advantage program must be nonprofits in order to qualify for the program.

By incorporating Community Advantage lenders into their programs, the SBA aims to expand access to capital and financial resources for small businesses operating in underserved markets. This change provides a dedicated platform for nonprofits and mission-oriented lenders to continue serving these communities and supporting the growth and success of startups, veteran- and women-owned businesses, as well as those located in rural and low-income areas.

To Qualify For 7(A) And 504 Loans, Lenders Will Now Take into Account a Reduced Number of Factors

The SBA has introduced changes to the qualification criteria for 7(a) and 504 loans, aiming to streamline the process and provide more objective standards for small businesses. Previously, businesses seeking an SBA loan had to demonstrate creditworthiness and the ability to repay the loan by meeting nine different factors.

Under the previous criteria, lenders assessed factors such as the business's ability to make loan repayments, experience, character and credit history, past and future financial statements,collateral, invested equity, the potential for success, and overall business strength. However, the new rule has simplified the credit criteria by focusing on three key factors.

The revised criteria now place emphasis on the following:

• Credit Score or Credit History

Lenders will consider the credit score or credit history of the business owner. This factor provides an objective measure of the borrower's creditworthiness and financial responsibility.

• Earnings or Cash Flow of the Business

The new rule takes into account the earnings or cash flow generated by the business. This factor allows lenders to assess the business's ability to generate sufficient income to repay the loan.

• Collateral

Collateral continues to be a significant consideration in the loan qualification process. Lenders will evaluate the assets that can be used as collateral to secure the loan.

By reducing the number of factors considered for loan qualification, the new criteria offer a more streamlined and objective approach. Small businesses now have a better chance of qualifying for an SBA loan based on these specific and measurable factors rather than relying on subjective elements like character, which can vary in interpretation among different lenders.

This change is expected to benefit a larger number of small businesses by providing a clearer path to securing an SBA loan. By focusing on credit history, business earnings, and collateral, the SBA aims to simplify the loan application process and promote greater access to financing for small businesses across various industries.

Why The SBA Loan Rules Are Changing?

The SBA rules are changing to address the issue of limited access to capital for small businesses in underserved communities. Currently, these businesses often face credit denials due to their existing qualifications. The new rules aim to tackle this problem by implementing the following measures:

1. Expanding the number of lenders

The SBA intends to broaden the pool of lenders that can process SBA loans. By allowing more financial institutions to participate, including non-bank lenders such as fintech companies, the SBA aims to increase the availability of capital for small businesses in underserved communities.

2. Less restrictive credit criteria

The rule changes aim to help more businesses qualify for SBA loans by revising the credit criteria. The SBA seeks to establish criteria that are more inclusive and accommodating, enabling a wider range of businesses to meet the requirements and access the funding they need.

3. Streamlining loan applications

The SBA recognizes the need for a streamlined loan application process that benefits both lenders and small businesses. By simplifying and improving the application procedures, the SBA aims to enhance efficiency and make it easier for lenders to process loan requests while providing a smoother experience for small businesses seeking funding.

These rule changes are necessary because the current SBA loan statistics, as derived from the SBA 7(a) and 504 summary report, highlight disparities and inadequacies in the existing system:

• Men consistently receive over 70% of SBA 7(a) and 504 loans each year, indicating a gender imbalance in access to SBA funding.

• Veterans receive less than 4% of SBA 7(a) loans and less than 3% of 504 loans annually, indicating a significant gap in providing support to veteran-owned businesses.

• Minority small business owners consistently lag behind their white counterparts, with white small business owners typically receiving over 40% of both 7(a) and 504 loans. This disparity reveals an urgent need to address the unequal distribution of funding opportunities based on race.

To address these disparities and create a more equitable lending landscape, the SBA recognizes the importance of updating its rules and programs. The goal is to ensure that small businesses in underserved communities, regardless of their gender, veteran status, or ethnicity, have equal access to capital, allowing them to thrive and contribute to economic growth.

When Do the New SBA Rule Changes Take Effect?

Effective May 11 and 12, 2023, the new SBA rule changes have brought about significant updates and modifications to various aspects of the SBA loan programs. Let's explore these changes in more detail:

May 11, 2023:

On this date, the SBA implemented revisions to the lending criteria and regulations governing SBA 7(a) and 504 loans. The changes encompassed several important areas, including:

1. Factors considered – The SBA updated the factors taken into account when evaluating loan applications. This includes criteria related to creditworthiness, financial stability, and other relevant considerations.

2. Loan conditions – The SBA introduced updates to the conditions under which loans are issued, such as interest rates, repayment terms, and collateral requirements. These changes aim to align the loan conditions with the evolving needs and challenges faced by small businesses.

3. Reconsiderations – The SBA modified the guidelines for reconsidering loan applications that were initially declined. The new rules provide additional opportunities for applicants to present additional information or address any discrepancies that may have contributed to the initial rejection.

4. Affiliation standards – The SBA revised the affiliation standards, which determine whether a small business is considered independent or affiliated with a larger entity. This revision clarifies and streamlines the rules for businesses seeking SBA loan assistance.

5. Using funds for partial changes in ownership – The SBA updated the guidelines regarding the utilization of loan funds for partial changes in ownership of small businesses. These changes aim to facilitate transactions involving changes in ownership structures, allowing businesses to access capital for such purposes.

May 12, 2023:

On this date, the SBA enacted significant changes related to Small Business Lending Company (SBLC) licenses and loan programs. These changes include:

1. Lifting the SBLC license moratorium – The SBA removed the moratorium that previously restricted the issuance of new licenses to Small Business Lending Companies (SBLCs). This change allows new non-bank institutions to apply for an SBLC license, broadening the range of financial entities capable of providing SBA loan products.

2. Community Advantage SBLC – To further expand lending opportunities, the SBA introduced the Community Advantage SBLC license. This license is specifically designed to enable nonprofit organizations and mission-oriented financial institutions to become licensed SBLCs. It empowers these entities to offer SBA loans and provide support to underserved markets, including startups and businesses owned by veterans and women, as well as those operating in rural and low-income communities.

3. Removal of Loan Authorization document – The SBA eliminated the requirement for a Loan Authorization document in the 7(a) and 504 loan programs. This change simplifies the loan process by eliminating the need for borrowers to obtain and submit this document during the application and disbursement stages.

By implementing these changes, the SBA aims to enhance access to capital, promote inclusivity, and streamline the loan application process for small businesses seeking financial support. These updates reflect the SBA's commitment to adapt and improve its programs to better serve the needs of the entrepreneurial community and foster economic growth.

Final Thoughts

In summary, the SBA is making big changes to its rules for Small Business Lending Company licenses. They will now approve borrowers based on new criteria and make the loan authorization process simpler, taking advantage of lenders' expertise and current technology.

The SBA also wants to help businesses that have been overlooked by creating new Community Advantage lenders. Nonprofits and mission-based lenders can now apply for a permanent license to support these underserved businesses.

If you want to know more about getting an SBA loan, you can connect with an SBA lender who can answer your questions. Just remember, you'll need to show that you've tried other business loan options before qualifying for an SBA loan.

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