On November 15, 2023, the revised Small Business Administration (SBA) Standard Operating Process (SOP) 50 10 7.1 took effect. There were a number of changes that could be very impactful to small business owners and their access to capital.

As an experienced small business lender, we wanted to break down the most impactful changes for small business owners. Click into each section below to learn more:

  • Business Acquisition Loans
    • Equity Injection
      • The SBA will still require an equity injection of 10% of the Total Project Cost of the transaction. However, they changed how that injection can come.
        • The Seller can provide all or part of the required equity injection with a seller note on full standby for at least 24 months. The seller note cannot have a balloon payment.
        • The Seller note can be on partial standby (interest payments only being made) if:
          • At least 25% of the required equity is coming from a source other than the seller note and
          • The historical business cash flow supports the ability to make the payments.
    • Seller Earnouts / Buyer Rebates
      • Seller earnouts are prohibited.
      • Rebates to buyer based on business performance are allowed.
        • Most often this will be a seller note with an offset. A seller note with this structure cannot be used as part of equity injection.
        • If the borrower receives funds based on the rebate (not a seller note, actual funds transfer), those funds must be applied to pay down the SBA loan up to 25% of the outstanding balance.
    • Partial Change of Ownership
      • SBA has made eligible sale of partial ownership in a business. Loan proceeds may be used to fund the purchase of a portion on one or more owner’s interest in the business or of the business itself.
      • Both the business and the individual owner(s) who is acquiring the ownership interest must be coborrowers on the loan.
      • Anyone that owns 20% or more of the business post transaction must provide an unlimited personal guarantee on the loan
    • Business Acquisitions with Real Estate
      • If 51% or more of purchase price is for real estate, term of loan can be up to 25 years.
      • If less than 51% of purchase price is for real estate, a blended term based on the use of proceeds is allowed.
  • Commercial Real Estate Loans
    • SBA allows 100% financing on owner occupied commercial real estate (OOCRE) with an SBA 7(a) loan.
    • Maximum term of 7(a) loan may be up to 25 years.
    • Mixed Purpose Loans
      • When loan proceeds are used for multiple purposes (land and building, working capital, machinery, and equipment or refinancing of any of these purposes) the lender may do a blended maturity or, if 51% of the use of proceeds of the loan are for real estate the maximum maturity on an SBA 7(a) loan may be up to 25 years.
    • If an SBA Lender is taking the business real estate as collateral, and if the loan proceeds are being used to refinance, acquire, install, improve, construct, or renovate real estate and/or machinery and equipment, the loan recipient must obtain flood insurance on the collateral and its contents if it is located in a special flood hazard area. SBA Lenders must notify Borrowers that flood insurance must be maintained under the National Flood Insurance Program or comparable private flood insurance.
  • 7(a) Small Loans
    • SBA redefined this to mean any SBA 7(a) loan of $500,000 or less. Previously this had been limited to loans of $350,000 or less.
    • Proceeds can be used for any eligible purpose under SBA 7(a) loan guidelines.
    • For Small 7(a) Loans only, SBA does not require a Lender to place a lien on non-business assets such as personal homes even if it is the Lender’s policy to do so.
  • Guarantee Fees

      Although not part of the SOP 50 10 7.1 effective November 15, 2023, the SBA had previously announced SBA Guarantee Fee reductions on SBA 7(a) loans for borrowers effective October 1, 2023, through September 30, 2024, as follows:

    • For loans with a maturity that exceeds 12 months:
      • For loans of $1,000,000 or less: 0.00%
      • For loans of $1,000,001 to $2,000,000: 1.45% of the guaranteed portion of the loan up to and including $1,000,000, plus 1.70% of the guaranteed portion of the loan over $1,000,000.
      • For loans $2,000,001 and greater: 3.50% of the guaranteed portion of the loan up to and including $1,000,000, plus 3.75% of the guaranteed portion of the loan over $1,000,000.
    • Multiple 7(a) loans made within 90 days of each other
      • When two or more 7(a) loans (with maturities exceeding 12 months and includes SBA Express Loans) are approved for an applicant, including its affiliates, within 90 days of each other, the loans are considered one loan for purpose of determining the percentage of guarantee and the Upfront Fee (SBA Guarantee Fee) calculation. This rule applies regardless of whether the loans were approved by the same or different Lenders.
    • This represents a substantial cost savings for borrowers on loans $2,000,000 or less compared to the historic levels of the SBA Guarantee Fees.

      While this does not include all the changes made in the SBA rules that came out either effective August 1, 2023 (SOP 50 10 7) or effective November 15, 2023 (SOP 50 10 7.1), it is intended to give some highlights on common transactions.  For a complete review, here is the link to SBA.Gov where you can download a complete copy of the SBA SOP 50 10 7.1 for your review.

      Our experienced team of Business Development Officers are trained experts on the SBA Rules and Guidelines and can answer any questions you might have.  SBA Lending is all we do, and we’re here to help you move forward to achieve your goals.  Click here to find the BDO nearest you.