Welcome back to another insightful episode of the Investor Financing Podcast! In today's episode, we delve into the recent seismic shifts in Small Business Administration (SBA) financing. With a cascade of changes taking place, particularly on May 11th and further transformations scheduled for August, it's crucial to understand the implications and capitalize on the opportunities arising. Let's explore the key takeaways from this discussion.
Partial Changes of Ownership: A Paradigm Shift
Old Guidelines
In the past, a complete 100% change of ownership was mandatory for SBA financing. However, the game has changed. Excitingly, partial changes of ownership are now permissible. This allows retiring owners to sell a partial interest in the business, opening doors for unique and potentially groundbreaking financing structures.
Implications and Challenges
Owners contemplating retirement can retain a stake (e.g., 19%) while the new buyer secures the majority (e.g., 81%). This dynamic shift raises intriguing questions about personal guarantees and opens the door for 100% financed deals. However, the industry awaits to see how lenders will respond to these changes, given their traditional preference for visible “skin in the game.”
Timeline of Changes
Effective Dates
May 11th marked the initiation of some changes, but the most substantial alterations are slated for August 1st of the same year. It's crucial to stay updated and align strategies accordingly.
Down Payment Dynamics
Seller Contributions
Historically, sellers could leave 5% on full standby for the entire term of the loan. The new guidelines reduce this requirement, allowing the loan to be on partial standby for just two years. This change, effective from August 1st, brings increased flexibility to the down payment process.
Seller's Role Post-Sale
Duration of Stay
Previously capped at 12 months, the seller's duration with the company has undergone a significant shift. Sellers can now stay on indefinitely, providing continuity and potentially smoothing transitions.
Zero Money Down Purchases: A Game-Changer?
SOP Changes
Theoretically, buyers could now acquire businesses with zero money down, thanks to changes in the Standard Operating Procedure (SOP). While this concept is intriguing, the practical implementation and lender response remain uncertain.
Personal Liquidity Rules Rewritten
Credit Elsewhere Test Eliminated
The elimination of the credit elsewhere test is a monumental change. Borrowers with substantial funds in the bank, previously denied under this rule, now have the green light for SBA loans.
The Vanishing SBA Directory
Franchise Concept Approval
The removal of the SBA directory, a list of pre-approved franchise concepts, creates uncertainty. Lenders may need time to adjust and develop new evaluation methods, potentially leading to more opportunities for a diverse range of franchises.
Lenders' Concerns and Congressional Oversight
Risk and Oversight
Lenders express concerns about the zero-down rule potentially leading to increased default rates. Congressional oversight reflects a cautious approach to the SBA's rule changes, emphasizing the need for prudent lending.
Empowering Key Employees: A Win-Win
Benefits for Key Employees
The new rules empower long-term employees, like Joe at the auto body dealership, to become business owners. Allowing owners to retain equity facilitates smoother transitions and presents an opportunity for key employees to take the helm.
Seizing Opportunities: What's Next?
Strategic Approaches
For business owners, buyers, and brokers, navigating these changes requires strategic thinking. Understanding the sweet spots of different banks, compensating for collateral shortfalls, and aligning with the right lenders are essential components of successful SBA financing.
Conclusion: Navigating the Evolution of SBA Financing
As the SBA financing landscape undergoes a revolution, staying informed and adapting to these changes becomes paramount. Whether you're a business owner, buyer, or broker, the evolving SBA guidelines present both challenges and opportunities. By understanding the nuances and strategically aligning with lenders, you can navigate this evolution successfully.
If you're eager to explore SBA financing further, consider booking a call with our expert to discuss your unique situation. The links are below, and we look forward to guiding you through the dynamic world of SBA financing.
Remember, the only constant in finance is change. Stay informed, stay proactive, and unlock the full potential of SBA financing in this transformative era!