Despite an improving economy, small business owners continue to have difficulty obtaining loans from banks. Enter the Small Business Administration, which acted this week to loosen bank purse strings and make the process of obtaining a small business loan easier.
The SBA announced on April 21 that it had implemented several rule changes designed to increase the flow of credit to entrepreneurs. As J.D. Harrison detailed at washingtonpost.com on the same day, the rule changes were implemented to simplify the application process for the borrower and give banks more leeway in loan structuring in the SBA’s two most popular loan programs.
Harrison wrote that the SBA’s 7(a) and 504 loans are most affected by the changes. The 7a loan is the SBA’s standard loan, funded entirely by a bank or credit institution and guaranteed in part by the government — the agency covers a portion of the 7a loan if the borrower defaults. A 504 loan is simply regulated by the SBA, and targets funding of large capital expenditures such as real estate or machinery. Such loans are funded by a partnership of private banks and a non-profit Certified Development Companies.
What does the rules adjustment do exactly? The SBA has first rid the loan programs of the wealth test, by which past applicants had been disqualified from loan consideration if they brought too much personal wealth or assets to the table.The SBA recognized that even wealthy small business owners needed loans to fund their enterprises, and since few had ever actually been denied under the rule, it was seen as more of an administrative hindrance.
Second, business owners seeking 504 loans can now use any form of collateral of appropriate value to back a loan. Previously, they had been limited to using as collateral the very assets they were using the borrowed funds to buy. The new rules afford borrowers putting up other collateral the possibility of negotiating better loan terms.
Third, the look-back period on 504 loans has been eliminated, removing a sizable impediment to the funding of projects requiring permits. Prior to April 21, SBA rules allowed for coverage of expenses associated with the loan going back only nine months from the application date. If the borrower had to buy building permits — some of which can take a year or more to obtain — more than nine months ahead of starting work on a construction or renovation project, he could not cover the cost of those permits with the loan. The rules now allow for funding of any expense tied to the project funded by the loan.
Harrison, J.D. “The Small Business Administration Just Made it a Little Easier to Secure a Loan“. Washington Post. April 21, 2014.