On August 1, 2023, the U.S. Small Business Administration (SBA) announced some key changes to its 7(a) and 504 Loan Programs. We wanted to know what these updates meant for small business borrowers — without having to interpret every line of the new policies. So we turned to a trusted SBA lending expert. David Hulit of Ready Capital, a top 1% SBA lender and Baton partner, gave us his take:

"The recent SBA changes to their SOP (Standard Operating Procedure) are opening up the program, expanding opportunities for more diverse sets of borrowers.”

- David Hulit, VP, Business Development Officer, Ready Capital

First, what is an SBA loan and why is this important?

An SBA loan is a small business financing option partially guaranteed by the federal government. It provides funds to small business owners and first-time borrowers who can’t find credit elsewhere “on reasonable terms.” One of those terms is a more gradual repayment time frame. As you can imagine, this has made the SBA program an important — and more inclusive — source of small business growth since it launched in the 1950s. (And it has just gotten more inclusive with this update.)

Who offers SBA loans?

Certain banks and non-banks (both brick-and-mortar and online) have SBA loan programs. The SBA’s 2023 expansion aims to bring more lenders into the fold – which is both exciting and reason for caution as not all SBA lenders have the same values or expertise. In fact, the SBA holds its own list of SBA Preferred Lending Partners (PLP) of which Ready Capital is one.

What are the SBA 7(a) and 504 loans that this expansion impacts?

Both the SBA 7(a) and 504 loans are popular with small businesses and provide up to $5 million in funding. While the 504 is a common choice for owner-occupied commercial real estate and machinery/equipment purchases (e.g. a business owner who decides to buy the building they’ve been renting), the 7(a) is a highly flexible loan that covers everything from the same to business acquisitions, working capital, partner buyouts, and other uses. 

With that background digested, let’s dive into David’s SBA Loan Program expansion takeaways, and what they mean for owners:

Zero percent down to purchase a small business

There are now a couple of 0% down loan scenarios available to small business owners and their lenders as a result of the program changes:

Scenario one: With seller note on standby

Now a borrower can purchase a business with as little as 0% down from the borrower so long as there is a 10% seller note on standby for 24 months. This is a major improvement from the old rules which required a minimum 5% down from the borrower, and the 5% seller note to be on standby for the life of the loan (typically 10 or 25 years). The 24-month standby will entice many sellers who were previously reticent to participate in this structure. 

David’s insight: This could be an excellent option for managers and/or employees who aim to purchase the business they currently work for.

Scenario two: When a business acquisition is actually an expansion

The SBA has confirmed a long-held but little-known position: When an existing business starts or acquires another business that has: 

• the same 6-digit NAICS code

• identical ownership

• the same geographic area as the acquiring entity

… and they are co-borrowers, the SBA considers this a business expansion and not a new business formation. In practice, this also allows for a 0% down acquisition.

SBA Character Determinations: now more inclusive

The SBA has simplified the process for character determinations and has empowered lenders to clear items like felony convictions, which historically required a burdensome submission process, sometimes taking months to clear.

Quicker turn times for newer franchises 👋

The SBA Franchise Directory has been removed, which will expedite loan processing for newer franchises that were not in the old directory. Historically, if a newer franchise was not on the approved directory, it could take months to resolve. Now, lenders are able to assess franchises internally which will drastically expedite turn times.

Keeping an eye on “Partial Partner Buyouts”

According to David, The SBA has also opened the door to “Partial Partner Buyouts”, however, the technical rules surrounding this are still being worked out, so Baton, Ready Capital, and other small business providers are keeping an eye on this one as more information becomes available. (Check back in for updates!)

The bottom line

The SBA’s updates will undoubtedly result in more small business owners and future owners gaining access to the financing they need to acquire and grow. We’re excited to see what comes next.