In the ever-evolving landscape of business financing, the Small Business Administration (SBA) is making significant updates to its Standard Operating Procedures (SOP) that will impact entrepreneurs seeking loans in 2025. In this article, we will delve into the recent changes affecting SBA loans, including the reinstatement of the franchise directory, new eligibility criteria, and the implications for borrowers. Whether you're an aspiring franchisee or an experienced business owner, understanding these changes is crucial for navigating your financing options effectively.

Reinstating the Franchise Directory

One of the most noteworthy changes is the reinstatement of the franchise directory. As of May 11, 2023, franchises listed on this directory will have until July 31, 2025, to execute the SBA franchiser distributor certification to maintain their listing. This is a major shift, especially for those involved in franchise startups.

Previously, some lenders required franchises to be listed on the directory to qualify for SBA loans. However, the discontinuation of the directory created challenges for many emerging franchises. For example, one major franchise lender stated that they would not proceed with financing unless the franchise was on the directory or had a strong Fran data score. Unfortunately, many emerging franchises did not meet this standard, making financing increasingly difficult.

With the return of the franchise directory, we can expect some lenders to revert to the old model, where being listed means automatic approval for financing. However, uncertainty remains regarding how banks will interpret these new rules. Many lenders may still require franchises to have a minimum of ten open locations, complicating matters for newer franchises that haven't yet reached this threshold.

Merchant Cash Advances and Debt Refinances

Another significant change is the ineligibility of merchant cash advances (MCAs) and factoring arrangements for debt refinances. Previously, many business owners who had taken out MCAs sought to consolidate their high debt payments into an SBA loan. Unfortunately, this option is now off the table.

This decision may further complicate the financing landscape for businesses already struggling with high debt levels. Many entrepreneurs were relying on this strategy to ease their financial burdens, and the new rule limits their options significantly. If you were considering consolidating your MCA into an SBA loan, it’s time to rethink your strategy.

Changes to 7(a) Small Loans

In yet another shift, the maximum loan size for 7(a) small loans has decreased from $500,000 to $350,000. This reduction may impact many small businesses looking for substantial funding to grow or sustain their operations. Additionally, the minimum acceptable SPSS score for these loans has risen from 155 to 165.

The SBA SPSS is a credit scoring model specifically designed for SBA loans, and it takes into account both the new business entity and the personal credit of the borrower. This change raises the bar for approval, making it more challenging for entrepreneurs to secure financing.

For small business owners aiming for a 7(a) loan, it's essential to be aware of these new requirements. Typically, a credit score of 680 or higher is favorable, along with low credit utilization. This means that borrowers should aim to keep their credit cards well below their limits to improve their chances of approval.

Delegated PLP Authority for Lenders

Another critical update involves the requirement for all lenders with delegated Preferred Lender Program (PLP) authority to process all loans under their delegated authority. This means that lenders can no longer send riskier deals to the SBA for underwriting. Instead, they must take full responsibility for the underwriting process.

This change may lead to a stricter approach to loan approvals, as lenders may be more cautious in their decision-making. Previously, some lenders would send uncertain deals to the SBA to mitigate their risk; however, this new rule places the onus squarely on the lenders. Consequently, riskier deals may face more scrutiny, potentially leading to a decrease in approved loans.

Implications for Borrowers

With these changes, it's clear that the SBA is tightening its lending criteria, which could create challenges for many borrowers. Most of the updates appear to be less favorable for those seeking financing, particularly emerging franchises and small business owners with high debt levels.

However, there is still hope. Entrepreneurs must adapt to these new regulations by improving their creditworthiness and exploring alternative financing options. Building a strong financial foundation and maintaining good credit will be crucial for navigating the evolving landscape of SBA loans.

Additionally, it may be beneficial to consult with a business ownership coach or financial advisor who specializes in SBA financing. They can provide guidance on the best strategies to secure funding and help you understand the implications of these changes on your specific situation.

Conclusion

As we look ahead to 2025, the landscape of SBA loans is changing, and it’s important for entrepreneurs to stay informed about these developments. The reinstatement of the franchise directory, the new eligibility criteria for loans, and the tightening of lending practices will significantly affect how businesses access funding.

Entrepreneurs should take proactive steps to enhance their credit profiles and explore various financing avenues. Whether you are considering opening a franchise, acquiring an existing business, or starting a new venture, understanding these changes will equip you with the knowledge needed to make informed decisions. For those interested in learning more about business ownership and financing strategies, consider attending workshops or consulting with experts in the field.

Stay tuned for further updates, and remember that knowledge is power in the world of business financing.