As a small business owner, securing financing can be a daunting task. However, things are about to get easier with the new SBA lending criteria, which took effect on May 11, 2023. The changes promise to simplify creditworthiness assessment and align SBA and non-government guaranteed loans. This article will detail these changes and how they’ll make it easier for small businesses like yours to access capital.
Simplifying Creditworthiness Assessment
The new SBA lending criteria aim to simplify creditworthiness assessment for small businesses seeking loans. With the reduction in factors considered, lenders only need to evaluate an applicant’s credit score/credit history, earnings or cash flow, and any equity or collateral. This change streamlines the process and makes it easier for lenders to evaluate loan applications while simplifying what small businesses require to qualify.
Additionally, aligning SBA and non-government guaranteed loans allows lenders to use a credit scoring model that they already use for non-SBA loans when underwriting the loan. These changes are expected to encourage more lenders to make smaller dollar loans while reducing regulatory burdens on small businesses seeking funding through SBA loan programs like Express, 7a, and 504 Loans.
Reduction in Factors Considered
The new SBA lending criteria will significantly reduce the factors considered when assessing creditworthiness. This streamlined process focuses on business performance indicators, with less emphasis on personal credit scores. As a result, as a small business owner, you can expect faster and more efficient loan evaluations.
The new SBA lending criteria will simplify the assessment of creditworthiness, resulting in faster and more efficient loan evaluations for small business owners.
In addition to simplifying the creditworthiness assessment, lenders can now use the same underwriting standards for both SBA and non-government guaranteed loans. This change will increase participation in 7a small loans and other small dollar loan programs by reducing regulatory burdens and facilitating quicker access to capital for underserved businesses.
Specified Criteria
Clear and concise guidelines for loan eligibility have been included in the new SBA lending criteria, making it easier for small business owners to understand their requirements. In addition, the increased transparency in the decision-making process provides greater assurance that loan applications will be evaluated fairly and objectively. These changes reflect the SBA’s commitment to supporting small businesses through various business loan programs over the past 25 years, including 504 loans, while reducing regulatory burdens and encouraging lender participation.
Aligning SBA and Non-Government Guaranteed Loans
Aligning SBA and non-government guaranteed loans is essential to streamline lending options for small businesses. With the new SBA lending criteria, lenders can use the same credit scoring model and credit policies they already use for their non-government guaranteed loans. However, it’s important to note that more guidance is expected from the SBA on business credit scoring models.
By aligning with internal policies for non-government guaranteed loans from an underwriting perspective, lenders can evaluate loan applications more efficiently while supporting small businesses through smaller dollar loan offerings. These changes reflect the SBA’s commitment to reducing regulatory burdens and facilitating increased participation in business loan programs for small and underserved businesses.
Meeting Internal Policies for Non-Government Guaranteed Loans
Updated requirements for financial statements, expanded collateral options and evaluation process, and a streamlined application process are ways lenders can meet internal policies for non-government guaranteed loans. These changes align with the new SBA lending criteria that simplify the lending process and make it easier for small businesses to access capital. The updated requirements include the following:
- Financial statement requirements have been reduced to only one year.
- Collateral options have expanded beyond real estate, allowing other assets, such as stock or equipment, to be used.
- Evaluation processes are more flexible, giving lenders more discretion when determining an applicant’s creditworthiness.
These changes will allow small businesses greater flexibility in their loan applications while still meeting internal policies set by lenders.
Lenders Encouraged to Use a Credit Scoring Model to Approve Loans
Benefits of Credit Scoring Model for Small Businesses
A credit scoring model is a great way to evaluate applicants’ creditworthiness, as it streamlines the lending process and makes it easier for lenders to assess loan applications. This new SBA lending criteria encourage lenders to use a scoring model while simplifying the factors they must consider when determining reasonable repayment assurance.
Factors Considered in the Credit Scoring Model
The new rule specifies three specific criteria that can be considered individually or in combination: the applicant’s credit score/credit history, earnings or cash flow of the applicant, and any equity or collateral. Improving these factors for business owners seeking financing can increase their chances of being approved for a loan.
How to Improve Your Business Credit Score
Small business owners can take steps towards improving their personal and/or business credit scores by paying bills on time, maintaining low balances on revolving accounts (such as lines of credit), correcting errors on reports from major bureaus like Equifax®, Experian®, and TransUnion®, limiting hard inquiries into their accounts within short periods during times when they are applying for loans among others. By taking measures such as these, entrepreneurs will become more attractive borrowers under SBA’s new set of rules.
Streamlining Small Dollar Loan Offerings
The new SBA lending criteria will streamline small dollar loan offerings, making it easier for lenders to support small businesses through smaller loans. The removal of hazard insurance requirements for loans under $500,000 and allowance of loan proceeds for partial changes in ownership reflects the SBA’s commitment to reducing regulatory burdens and encouraging more lenders to make smaller dollar loans. This shift will provide clarity and simplicity in the application process while ensuring that small businesses can access the capital they need.
Allowance of Loan Proceeds for Partial Ownership Changes
Small business owners can now access financing for partial ownership changes under the new SBA lending criteria, providing increased flexibility in using loan proceeds to fund strategic growth opportunities. In the past, buying a business using SBA financing would require a complete change of ownership, but with new SBA conditions, partial change of ownership is now allowed. This is a welcome change, as investors can now partially buy into a business, making entrepreneurship more accessible.
Removal of Hazard Insurance Requirements for Small Loans
Part of the SBA rule changes is reducing hazard insurance requirements for loans under $500,000. Additionally, faster loan processing times and less paperwork is required, making it easier for small businesses to access the funds they need quickly.
Here is a summary of the changes:
- Small businesses no longer need to purchase hazard insurance policies
- Reduction of financial burden on small businesses
- Faster loan processing times and less paperwork required
Changes in Affiliation Rules
The new SBA program lending criteria include changes in affiliation rules, which will provide more clarity and simplicity in the application process. In addition, the change focuses on whether an applicant has a majority ownership in another entity, simplifying things for franchise lending. This final rule is expected to make it easier for small businesses to access the capital they need to grow and thrive.
Expanded Definition of Affiliates
Under the new SBA lending criteria, there has been an expansion in the definition of affiliates. Implementing this change means that more entities will now be considered affiliates and subject to affiliation rules regarding loan eligibility. As a result, the SBA is closing loopholes that allowed some small businesses to avoid affiliation with larger organizations, resulting in them receiving disproportionate loans.
Fewer Exceptions to Affiliation Rules
The final rule also reduces exceptions to the affiliation rules. Previously, exceptions were applied based on industry type or other factors; however, fewer exemptions are provided under the new criteria. These changes may result in entities deemed ineligible for financing terms they might have previously received.
Impact on Loan Eligibility
The changes in affiliation rules are expected to impact loan eligibility for many small businesses seeking SBA loans. However, these changes aim to guarantee fairness and consistency across all industries and reduce opportunities for large corporations to disguise themselves as smaller ones while retaining ownership over multiple small companies. Therefore, small business owners should review their affiliations carefully before applying for an SBA loan under these new guidelines.
What are the Benefits of Using an SBA Loan?
Small business owners can benefit significantly from using an SBA loan. Firstly, SBA loans typically offer lower interest rates and more flexible repayment terms than traditional bank loans. It makes it easier for small businesses to access the funds they need to grow and expand without incurring the high-interest rates and inflexible repayment terms that can often come with traditional loans.
Another benefit of SBA loans is that they can be used for various business purposes, including purchasing inventory, buying equipment, and even acquiring other businesses. This makes them a versatile funding option for small businesses, allowing them to use the funds they receive in a way that best suits their needs and goals.
In addition, SBA loans are often easier to obtain than traditional bank loans, as the SBA offers a variety of programs designed specifically to help small businesses access the capital they need to succeed. The SBA also works with a network of lenders who are experienced in working with small businesses, making it easier for entrepreneurs to find a lender that is the right fit for their needs.
Finally, SBA loans can help small businesses build credit and establish a financial track record. By making timely payments on their SBA loans, small businesses can demonstrate their creditworthiness and build a solid financial foundation that will help them secure future financing as their business grows and evolves.
Overall, the benefits of using an SBA loan are clear, from lower interest rates and flexible repayment terms to a wide variety of eligible uses and easier access to funding.
Final Thoughts
The new SBA lending criteria are a welcome change for small business owners who have struggled to secure financing. With more flexibility and streamlined processes, it’s now easier than ever before to access funding that can help grow your business. So whether you’re looking to expand your operations or need working capital, don’t hesitate to explore the options available through the SBA.
Remember, having a solid financial plan, and clear goals will increase your chances of success when applying for loans. And with the new lending criteria, you can achieve your dreams as a small business owner. So take action today and start exploring all the opportunities available to you.
