2023 SBA SOP Updates: Key Changes Explained

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The Small Business Administration (SBA) has introduced pivotal updates to its Standard Operating Procedures (SOP) marking a significant shift in the landscape of small business financing. These changes, embedded within two Procedural Notices and the new SOP, are particularly relevant to the 7(a) and 504 lending programs, which are cornerstone resources for small businesses seeking financing for ownership changes and expansions. These updates collectively introduce a series of changes designed to streamline lending processes, enhance flexibility in financing arrangements, and broaden the eligibility criteria for prospective borrowers. The aim is to make SBA loans more accessible and adaptable to the diverse needs of small businesses in today’s dynamic economic environment.

Equity Injection Requirements

One of the most noteworthy updates revolves around the requirements for equity injection.  Under the updated SOP, the SBA has adjusted its stance on equity injection requirements, particularly for transactions resulting in a complete change of ownership. The revised guidelines stipulate that an equity injection of at least 10 percent of the total project costs is required for acquiring a business. This move is designed to ensure that new owners have a significant financial stake in the success of the business, thereby aligning interests and promoting sustainable business practices. 

Previously, the nuances of how seller debt could contribute to equity injection were more restrictive. The updates allow for seller debt that is on full standby (meaning the seller does not receive payment of principal or interest) or is interest-only for a minimum of two years to be considered as part of the equity injection. This adjustment opens up new possibilities for structuring deals, providing both buyers and sellers with more flexibility in negotiations and deal-making.

For small business owners looking to acquire another business, understanding these new equity injection requirements is crucial. It not only affects how deals can be structured but also impacts the overall financing strategy for the acquisition. Similarly, for sellers, these changes may influence the attractiveness of different deal structures and the negotiation process with potential buyers.  By carefully navigating these changes, both buyers and sellers can better position themselves for successful transactions that align with their financial and business objectives.

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Employee Stock Ownership Plans (ESOPs)

Under the new SOP, lenders with delegated authority now have a streamlined process for submitting ESOP transactions, reducing administrative hurdles and encouraging the adoption of employee ownership models.  This change is particularly beneficial for small businesses looking to ensure long-term sustainability and for employees seeking to invest in their workplaces.

Most notably, ESOPs purchasing at least a 51% interest in their employer’s business are exempt from the equity injection requirement. This pivotal adjustment makes it financially easier for employees to become business owners, broadening the scope for employee-led business acquisitions. It opens up new possibilities for business succession planning, allowing owners to pass on their legacy to their employees without the financial strain typically associated with such transitions.

These changes are set to reshape the landscape of business ownership and succession planning, making ESOPs a more attractive and accessible option for businesses and their employees alike.

SBA Loans for Partial Changes of Ownership

The SBA has introduced a significant update to its lending policies, now allowing loans to support partial changes of ownership. This adjustment enables SBA loans to cover the acquisition of partial stakes in businesses, paving the way for diverse and mutually beneficial deal structures. Entrepreneurs can now use SBA financing to buy into a business without needing to acquire full ownership, offering a flexible approach to business growth and succession planning.

This policy change also permits selling owners to retain a role within the business, maintaining involvement in its daily operations as officers, directors, or employees. Such arrangements ensure continuity and leverage the seller’s expertise post-transition, benefiting the business’s long-term stability and growth. However, it’s important to note that the policy excludes rolled equity from eligibility, maintaining a clear distinction in ownership stakes post-transaction.

By accommodating partial ownership changes, the SBA is broadening access to financing, encouraging innovative business transitions, and supporting the ecosystem of small business ownership in a more inclusive manner.

Expanded SBA Loan Eligibility: $3.75 Million Additional Guarantee

The new SOP introduces a significant opportunity for entrepreneurs, offering an additional $3.75 million in guaranteed dollars for those acquiring businesses outside their current industry sector. This increase effectively allows for a $5 million 7(a) loan and applies to individuals purchasing a business in a different 3-digit NAICS subsector than any they currently own with SBA debt. The criteria extends to businesses where the applicant has more than a 50% stake, including those owned by or owning the applicant business, provided they operate within the same industry subsector. This change marks a departure from previous practices, where personal guarantors’ existing SBA debt was counted against their total SBA loan eligibility, opening new avenues for business expansion and diversification.

Buyer Rebates in SBA Financing

The updated SOP now explicitly permits the use of buyer rebates.  This allows a portion of the seller’s proceeds to be held in escrow as a performance-based holdback, which is released to the buyer upon achieving predetermined business milestones. This flexibility enhances deal structures, providing a strategic tool for addressing various transactional risks such as market concentration, employee retention, growth projections, and transitions of licenses, suppliers, or customers.

Previously, while Seller Promissory Notes with performance-based covenants were permitted, the explicit allowance for buyer rebates introduces a new layer of financial creativity and security. This development not only facilitates smoother negotiations and deal closures but also aligns the interests of both parties towards the sustained success of the business post-acquisition.

Elimination of the Personal Resource Test

The SBA has removed the personal resource test from its loan application process. Previously, applicants needed to demonstrate that they couldn’t cover the loan amount with their own liquid assets, a requirement that often favored applicants with fewer personal resources. Now, lenders will no longer assess an applicant’s personal liquidity, opening the door for financially robust individuals to secure SBA loans more easily. This change is particularly beneficial for well-capitalized borrowers aiming for multiple projects, as it allows them to maintain reserves without diluting their investment in any single venture. Additionally, this update simplifies the application process by reducing the documentation required to verify equity, streamlining loan approvals and facilitating access to capital for a broader range of business owners.

Explore your Business's Potential

As a leading provider, LoanBud is here to guide you through the intricacies of buying, building, and growing your business with the latest SBA loan options. Our commitment to staying ahead of SBA regulations means you can count on us for a seamless and successful financing experience. Discover more about how the updated SBA SOP can benefit your business.  We make it easy to apply, and get the funds you need for your business.

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