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Changes to SBA 7(a) Program to Foster Entrepreneurial Endeavors
Recent modifications in the Small Business Administration (SBA) Standard Operating Procedures have big implications for individuals and businesses contemplating expansion or acquisition. These adjustments have been designed with an eye toward fostering entrepreneurial endeavors.
Primarily, by streamlining access to credit, the SBA aims to alleviate the financial roadblocks that often
deter business growth. But perhaps even more notable is the removal of the mandatory SBA equity
requirement, provided that certain conditions are met. This significant shift underscores the SBA’s
commitment to facilitating business transactions, hoping to make it considerably easier for enterprises to
secure the necessary backing.
In essence, these procedural changes represent a more accommodating and strategic environment for
business growth and acquisition. For those with ambitious business plans, it’s an opportune moment to
revisit and potentially capitalize on these revised guidelines.
For entrepreneurs and business owners here’s some key information on the changes regarding business
Complete Change of Ownership
If the transfer of ownership qualifies as a “business expansion” of the buyer, then the
SBA will not require a minimum equity injection. Generally, the SBA requires at least a 10% equity
injection of the total costs required to complete the transfer of ownership (including acquisition and initial
operating expenses such as working capital).
To qualify as a business expansion the buyer must
- Own a business in the same 6-digit NAICS code
- Have identical ownership
Be located in the same geographic areas as the entity being acquired.
With that said, if the buyer is not a strong lending candidate, a bank may require an equity injection;
however, such action is outside the scope of the SBA program.
Complete Partner Buyout
If certain conditions are satisfied, then more than 90% of the purchase price of partner buyout
may be financed by a 7(a) loan. In order to qualify, both (a) the remaining partners must certify that they
have been actively participating in the business operation and held the same or an increasing ownership
interest in the business for at least the past 24 months; and (b) balance sheets for the business for the most
recent completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1
prior to the change in ownership.
If these conditions are not met, then the remaining partner(s) must contribute cash in the amount
of at least 10% of the purchase price of the business.
Partial Change of Ownership or any other Change in Ownership
If the balance sheets for the business for the most recently completed fiscal year and current quarter
reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership, then more than 90%
of the purchase price of the partner buyout can be financed by a 7(a) loan. If not, then the remaining
partner(s) must contribute cash in the amount of at least 10% of the purchase price of the business.
Also, both the business and the owner(s) acquiring the business must be co-borrowers on the loan, while all owners with 20% or more interest are required to provide an unlimited guarantee.