On April 12, 2023, the U.S. Small Business Administration (SBA) published two new rules: (1) Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a Loan Authorization (Moratorium Rule) and (2) Affiliation and Lending Criteria for the SBA Business Loan Programs (Affiliation Rule), collectively, the Rules. The Rules focus on combating persistent gaps in access to capital affecting small business owners in underserved communities. Starting May 11, 2023, small businesses and entrepreneurs will have more opportunities to obtain capital for growth and development.
The Moratorium Rule
Small businesses and entrepreneurs face major issues related to limited access to capital and restrictions imposed on lenders, especially within the 1,600 bank deserts in America. To combat those issues, the Moratorium Rule (1) lifts the moratorium on licensing new SBLCs and (2) adds a new type of lending entity called a “Community Advantage SBLC.” SBA decided to lift the moratorium, which capped SBLC licenses at 14 for the past 40 years, to increase the number of nontraditional lenders, afford entrepreneurs business opportunities, and create more jobs in underserved communities.
A Community Advantage SBLC is a nonprofit lending organization focused on providing small businesses and entrepreneurs in underserved communities access to capital. In other words, the Community Advantage SBLC program was established to reduce the capital market gaps by increasing the availability of 7(a) loans.
The Affiliation Rule
To facilitate the 7(a) and 504 loan process, the Affiliation Rule streamlines SBA’s lending criteria by reducing the number of factors lenders must consider, in addition to creditworthiness and reasonable assurance of repayment. When approving loans, the new rule allows SBA lenders and Certified Development Companies to consider (as applicable) any of the following three criteria, individually or collectively:
- the credit score or credit history of the applicant (and, if applicable, the operating company), its associates and any guarantors;
- the earnings or cashflow of the applicant; or
- any equity or collateral of the applicant, where applicable.
Additionally, among other revisions, the new rule requires SBA lenders to:
- use appropriate and acceptable commercial credit analysis for similarly sized non-SBA guaranteed commercial loans;
- underwrite SBA loans in the same manner they underwrite similarly sized non-SBA guaranteed commercial loans; and
- require hazard insurance as collateral on 7(a) loans greater than $500,000 and 504 projects greater than $500,000.
In the event a small business or an entrepreneur’s 7(a) and 504 loan application is denied, SBA will allow either the Director of the Office of Financial Assistance or the Director’s designee(s) to make the final decision on reconsideration. Previously, only the Director of the Office of Financial Assistance had this authority. The change is expected to facilitate fair and expeditious loan reconsiderations.
Another noteworthy change is that borrowers may use 7(a) loan proceeds to fund partial changes of ownership, as well as full changes of ownership. In other words, borrowers can:
- purchase a portion of a business or a portion of an owner’s interest in a business;
- purchase the entire business or an owner’s entire interest; or
- purchase the partial or entire interests of multiple owners.
SBA intends to allow the selling owner to remain as an owner and involved in the day-to-day business, including as an officer, director, Key Employee, or employee when engaging in the partial selling of ownership.
Together, the Rules afford small businesses and entrepreneurs more access to government-guaranteed lenders equipped with the necessary tools to streamline application and review processes, approve loans, and assist applicants in achieving their business objectives.