January 5

SBA Financing Updates

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The landscape of Small Business Administration (SBA) financing has undergone a significant transformation, particularly concerning partial ownership changes. Until May 2023, stringent guidelines mandated a 100% change of ownership for any alterations in business ownership structures, posing challenges for entrepreneurs seeking flexibility in bringing in new partners or investors. In this blog post, we'll explore the old versus new rules and the game-changing updates that every small business owner should be aware of.

Old Guidelines: A Barrier to Flexibility

The previous SBA guidelines stipulated a complete transfer of ownership in the event of any partial changes. Whether it was bringing in a new partner or selling a portion of the business, the entire ownership had to be transferred. This proved to be a roadblock for business owners aiming to retain some ownership while introducing additional investors or partners.

Implications for Buyers in Business Acquisitions

For prospective buyers looking to acquire an existing business, the seller was compelled to relinquish 100% ownership. Buyers then had to provide a substantial equity injection, typically ranging from 10% to 15%. This meant that the SBA would lend up to 90% of the total project cost unless the seller agreed to leave 5% equity on full standby.

New SBA Rules: A Paradigm Shift

The paradigm shift came with the introduction of new SBA rules that allow for partial changes in ownership. Now, buyers can acquire a majority stake without the necessity of a 100% ownership transfer. This newfound flexibility enables buyers to leave the seller as a part-owner, for example, at 19%, exempting them from being on the loan or acting as a guarantor. This allows buyers to acquire 81% of the business with minimal cash investment.

Shortened Full Standby Term

A pivotal update in August further streamlined the process by reducing the full standby term from the life of the loan to just 24 months. Previously, sellers had to commit to a full standby for the entire loan duration, which could span up to 25 years. The new 24-month term significantly eases the idea of full standby for sellers, eliminating the need to wait for a decade or more to retrieve their equity.

Key Takeaways for Small Business Owners

In summary, for small business owners considering a partial change of ownership, staying abreast of the updated SBA guidelines is crucial. Consulting with a commercial mortgage advisor specializing in small business financing is highly recommended to navigate the intricacies of these changes effectively.

  • Flexibility is the New Norm: The new SBA rules provide small business owners with the flexibility they need to navigate partial changes in ownership.
  • Buyer Empowerment: Buyers can now acquire a significant stake without the burden of a 100% ownership transfer, making business acquisitions more feasible.
  • Shortened Full Standby Term: The reduction of the full standby term to 24 months enhances the appeal for sellers, simplifying the process for both parties.
  • Bank-Specific Requirements: While SBA rules have evolved, it's essential to recognize that individual banks may have additional requirements. Understanding these nuances is crucial.
  • Professional Guidance Matters: Seek guidance from a commercial mortgage advisor to ensure compliance with current regulations and make the most of new opportunities.

In conclusion, these changes in SBA financing rules signify a positive shift for small business owners exploring ownership changes. Staying informed and seeking professional advice will empower entrepreneurs to leverage these new opportunities effectively. If you have further questions or topics you'd like us to cover, feel free to let us know in the comments.


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