The SBA Just Made Business Acquisitions Easier

I led my state's top Small Business Administration, SBA, lender. Based on the number of deals, we were the top SBA lending credit union for four years in a row. Even when compared to banks. In our fourth year, we were among the top lenders based on the dollar amount lent through SBA programs.

The SBA loan programs have long been a great way to finance business growth. They require less of an equity injection and often allow longer repayment terms, making the borrower’s monthly payment more affordable.

Due to past rules, SBA loans were not always a great source of capital for use in business acquisition. Some rules made it tough for sellers of businesses. For example, in the past, a seller’s note was on standby until the SBA loan was paid off. That meant that seller financing was not paid until after the SBA loan.

Updated SBA Rule Changes Make Business Acquisition Easier

The recent SBA rule change announcements carried some beneficial rule changes that will make using SBA loans as part of a business acquisition easier.

In the past, sellers may have hesitated to work with a buyer using SBA financing since any seller notes were subordinate to SBA loans. However, under the new rules, that subordination will only last through the first 24 months of the SBA loan. Also, seller debt may count toward equity injection requirements if the business can demonstrate enough historical cash flow to make those payments.

The SBA has also recently announced other favorable changes to its policies. Including:

• Modernizing the credit criteria and underwriting standards: The SBA has updated them to make them more objective and easier for small businesses to understand. This will make it easier for small businesses to qualify for SBA loans, even with less-than-perfect credit.
• Expanding the lender network: The SBA has lifted the moratorium on licensing new Small Business Lending Companies (SBLCs). This will increase the number of lenders offering SBA loans, making it easier for small businesses to find a lender that meets their needs. For example, fintech companies can apply for an SBA license.
• Increasing opportunities for employee ownership: The SBA has made it easier for small businesses to become employee-owned. This is a great way for small businesses to attract and retain top talent and can also help improve the business's financial security.
• Permanently granting the SBA's program for nonprofit mission lenders: The SBA's program for nonprofit mission lenders, the Community Advantage program, provides loans to small businesses that are owned by or serve low-income communities. This program has been very successful in helping to provide capital to underserved communities, and the SBA has made it permanent so that it can continue to make a difference. Organizations that participate in this program, such as Community Development Financial Institutions or CDFIs, will benefit from this change.

Why These Changes to the SBA Programs Are Important

In the January release of the Senior Loan Officer survey, 44% of respondents said that their financial institution was tightening its loan criteria. The most common reasons were 1) a sputtering economy; 2) a lack of liquidity.

That tightening will mean fewer small-to-medium-sized businesses will get the capital they need to survive or grow.

Allowing more lenders to offer SBA-backed loans and reducing the friction in the process should improve access to capital.

Who Will Benefit from the Changes to the SBA Programs?

I’m a fan of most of these changes. But I do have some concerns.

I will be anxious to see how these changes to seller financing impact small-to-medium-sized businesses that are attempting to sell. My gut tells me that individuals looking to buy existing businesses won’t benefit as much from these changes as will established businesses and investors, i.e., private equity, that are looking to add a business to their portfolio.

I’m also concerned that the Community Advantage program could lead to higher SBA loan delinquencies and charge-off ratios. While I completely support providing capital to low-income communities, I don’t believe capital alone is enough.

To have a higher success rate for small businesses, we need to improve those founders' education and training opportunities.  SBA-tied organizations such as SCORE and the SBDCs (Small Business Development Centers) mean well, but from my experience, many of the people providing those services don’t have a lot of success under their own belt, let alone enough to teach someone else how to operate a business.

This increased access to capital needs to be packaged with increased resources provided to SMBs. So that they can put that capital to its proper use, make their payments, and eventually pay off that capital so that it can be recycled into another business.

My firm, The Harold Louis Group, specializes in helping businesses raise capital. If you are looking for investor funding or business loans, we can help. We've helped companies raise over $800M in capital.