Recent changes to SBA 7(a) loan program worth noting

Due to an increase in borrower defaults and to ensure the long-term sustainability of the 7(a) loan program, the Small Business Administration implemented major changes to its standard operating procedures in June. These changes are likely to reduce the number of borrowers able to utilize this financing option..Three of the most significant rule changes are summarized below.Heightened underwriting guidelines. A potential business owner must now prove the business’s viability through detailed financial reports, including cash flow analysis and the ability to meet key financial ratios. For example, a chef seeking a loan to open a catering business can no longer assume that the business qualifies for a 7(a) loan simply because the chef has substantial work experience in food service.Lenders required to use delegated authority.Lenders who have received delegated processing authority from the SBA to approve 7(a) loans are now required to use such authority for all such loans without oversight or assistance from the SBA. Therefore, the SBA will no longer be on record to approve unique situations that lenders with delegated processing authority may encounter.Changes in seller financing equity requirement.Although the 10 percent equity requirement for 7(a) loans has not changed, the ability to use seller financing to count toward this equity requirement has. A seller note may now only amount to half (5 percent total) of the required 10 percent equity contribution and the seller note must be on full standby for the entire life of the SBA loan.Overall, the changes made to the SBA 7(a) loan program will likely limit the number of borrowers who qualify for these loans; however, those who qualify will hopefully be strong borrowers and should provide lenders with some additional comfort when engaging in new SBA 7(a) lending transactions. Grace Sinclair is an attorney in the Banking and Finance Practice at Reinhart Boerner Van Deuren s.c., where she works with financial institutions and other clients in a variety of commercial transactions, including commercial lending and business reorganization, delivering insightful solutions to a wide range of matters.