A Guide to the New 2023 SBA SOP

The U.S. Small Business Administration (SBA) has implemented two Procedural Notices and new Standard Operating Procedures (SOP), which contain significant changes to the flagship 7(a) and 504 lending programs.  The 7(a) and 504 programs aim to support small business owners across the country who need funds to start and grow their business. The modernized lending criteria and conditions for the SBA’s business loan programs reduce red tape and expand access to SBA loans, getting more money in the hands of businesses nationwide. The updated guidance also seeks to better assist underserved communities like women, minority, veteran, and rural entrepreneurs.

We’re breaking down the top things you need to know about the new SBA SOP and additional guidance here.

1. Rules have changed around equity injection.
   Equity injection is defined as new cash or other acceptable assets added to the project that is not on the borrower’s balance sheet prior to the equity injection.
   
   Acquisitions: When purchasing a business that results in a new owner (complete change of ownership), the SBA requires an equity injection of at least 10 percent of the total project costs associated with the acquisition. Seller debt that is on full standby (meaning the seller is not accepting payment of principal or interest) can now be fully eligible as consideration for equity injection. 
    
   Startups: Under the new guidance, there is no equity requirement from the SBA for startup businesses. The bank’s internal credit policy will determine the amount of equity injection required for each applicant.
   
   Employee Stock Ownership Plans (ESOPs): Lenders that have delegated authority can now submit ESOP transactions as such. Additionally, loans to ESOPs for the purpose of purchasing a controlling interest (at least 51%) in the employer’s small business are not required to provide an equity injection.
   
   Additionally, through this new guidance, the SBA has also reduced the amount of documentation that lenders must collect to verify equity.
2. SBA is now allowing loans for partial changes of ownership.
   SBA loans can now be used to fund the purchase of a portion of one or more owner’s interest in the business. Partial business acquisitions are now eligible through SBA loans, creating exciting opportunities for deal structures that benefit all parties involved. Additionally, for partial changes of ownership, the selling owner is allowed to “remain as an owner and involved in the day-to-day business, including as an officer, director, key employee, or employee.”
3. SBA removed the principle of control of one entity over another from its affiliation consideration, which is used to determine whether the business is considered “small.”
   The new guidance simplifies the way in which lenders determine affiliation, removing the provisions on affiliation arising from management and control, franchise or license agreements, and identity of interest.
   
   The SBA’s affiliation standards have historically been quite complex. The goal of the previous guidance was to determine who "controls" a business entity. If you exerted control over the entity, then you were considered affiliated. Previously, lenders reviewed franchise and management agreements to ensure that the managing business/franchisor did not have too much control over a borrower. 
   
   Moving forward, the "control" element of affiliation is completely removed. Affiliation will boil down to percent ownership of other entities, with more than 50% generally being the threshold. The principle of control has been removed and lenders will only be evaluating ownership percentage.
4. Personal resource test is eliminated.
   SBA Lenders no longer need to consider the personal resources of the loan applicant when applying for SBA loans. Historically an applicant for a business loan had to show that the funds requested were not available from personal resources, meaning all the borrower’s usable liquid assets were reviewed. Under the new rule, SBA lenders are not required to evaluate the personal liquidity of the applicant during the review process.
5. Lending criteria for creditworthiness streamlined for loans under $500,000.
   SBA streamlined its lending criteria for loans under $500,000 by relaxing the amount of due diligence and documentation lenders must use in determining creditworthiness and reasonable assurance of repayment. Ultimately each lender will determine a process for handling loans of this size.  Lenders can now use any of the three specific criteria individually or any combination of the three specific criteria when approving loans: (a) The credit score or credit history of the applicant (and the Operating Company, if applicable), its associates and any guarantors; (b) The earnings or cashflow of the applicant; or (c) Where applicable, any equity or collateral of the applicant.
6. Refinancing business debt has been simplified. 
   The new guidance streamlined rules around loans that are eligible to be refinanced, making it less cumbersome for a lender to refinance its own debt and the debt of another lender.
7. Insurance requirements changed.
   The requirements for life insurance and hazard insurance are up to a bank’s internal policies. Life insurance is no longer a requirement for 7(a) and 504 loans, and the decision to assign a policy as collateral is left up to lenders. Hazard insurance is no longer required for loans under $500,000 with the exception of real estate collateral.