There's good news for entrepreneurs: Small-business lending is hot again.
Since the financial crisis of 2008, small businesses have had a difficult time accessing loans through traditional banks. But with small-business confidence on the rise and a slowly-but-surely improving economy, small-business borrowers are once again front and center on the competitive stage of business loans. Numerous non-bank lenders that are focused on small business have emerged in the past few years, with some lending hundreds of millions of dollars to smaller enterprises every year.
Most importantly, though, the Small Business Administration’s new administrator, Maria Contreras-Sweet, recently announced that SBA loan qualification requirements would be loosened. The changes affect the two most popular SBA programs: the 7(a) program and the 504 program.
Making Things Easier
As of April 21, the SBA made the following changes to two very popular small-business lending programs:
1. Removal of wealth test. The SBA no longer requires a personal resources or wealth test for potential borrowers for both 7(a) and 504 loans. The wealth test was meant to flag wealthy borrowers and potentially disqualify them from participation in SBA lending programs. Applicants were required to provide detailed information about their personal assets. But many small-business owners felt this was too intrusive and were uncomfortable putting their entire financial life under scrutiny just to apply for a small-business loan, so they avoided the SBA loan process altogether.
In practice, the requirement ignored the reality that even entrepreneurs with significant personal net worth might still need financing for their businesses. Many personal assets aren't liquid, like real estate in a bad market, and aren’t readily available for business use. In other cases, even wealthy owners were unable to obtain funding, negating the thinking that having personal wealth means you don’t need help with your business loan.
2. Revision of collateral requirements on 504 loans. The 504 loan program is designed to assist small-business owners with the purchase of physical assets such as equipment and warehouses. Like the 7(a) program, the SBA offers the lender a guarantee in case the borrower defaults. Before April 21, the only collateral that could be used for the loan was the actual asset being financed. Other collateral was not permitted.
But that’s no longer the case, and the SBA now allows other collateral to be used. For instance, let’s say your business owns a $2 million warehouse and needs to purchase $500,000 in vehicles. Under the new regulations, you can choose to have the warehouse instead of the trucks you're purchasing serve as the collateral for the 504 loan. This change allows owners to protect their most valuable assets and also access lower interest rates.
3. Changes to the time frame of qualifying expenses on 504 loans. The SBA used to have time restrictions with regards to what could be included in a 504 loan guarantee. Previously, only expenses incurred no more than nine months prior to the loan being issued could be paid for with loan proceeds. Unfortunately, when it comes to building or purchasing warehouses, office buildings and other fixed assets, it could take twice as long to complete the purchase. The change means that many expenses incurred early on (like permits and appraisals) can now be paid for from loan proceeds even if they were disbursed more than nine months before approval of the loan. For instance, if you paid $10,000 in permitting fees 24 months prior to the loan being issued, those fees can now be included.
Changes Ahead for 2015
The SBA would also like to make changes to the fee waivers on some loans. Currently, many SBA loans carry upfront fees, but some of those fees are being waived. The SBA has requested congressional authorization to continue the waivers for 2015 on the 7(a) loan program and expand the waivers to some Express and non-Express loans. As it stands now, the existing waiver covers the 2 percent upfront fee on 7(a) loans of $150,000 or less. The newly requested waivers cover SBA Express loans from $150,000 to $350,000 made to veterans. The SBA has also requested a 50 percent reduction in the upfront fees on non-Express loans over $150,000.
If you've been thinking about applying for a loan for your small business, this may be the time to act.
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