The SBA (Small Business Administration) guidelines for 7(a) loans have been updated – they do so annually – and are now in the market for these loans. There are a couple major changes worth noting for prospective borrowers. (They’re all worth noting, but the drill-down details are beyond the scope of this discussion.)
1. Minimum down payment has been reduced to 10% of the project amount. The project amount includes not only the business acquisition, but also inventory, working capital and closing costs. This level puts it on equal footing with their 504 loan. There are other features between the 2 types of SBA loans worthy of comparison, but those will be left for another time.
2. NEW – there is now a “liquidity test”. The intent here is to assure the buyer/borrower doesn’t borrow SBA money when they have it available as additional liquidity (equity) that they are holding back. For instance, a business buyer/borrower with $1mm liquid (cash & equivalents) buying a business for $600k may apply for a 90% loan, putting 10% ($60,000) down. The holdback of $940,000 would probably be in excess of the borrowers contingent reserves. There’s a formulation to be used in applying the liquidity test, but you get the idea. While some rainy-day liquidity is desired by the lender, there’s now such a thing as too much. From a calculation based on the deal structure and the borrower’s financial condition, a range of hold-back liquidity can be determined. The amount to be held-back is a subjective determination by the lender.
The SBA guidelines are just that. While guidelines set minimums & maximums, floors and ceilings, etc. each lender has some discretion/flexibility in applying their loans to the guidelines, and all lenders should be considered subjectively different in their application to the guidelines.
A word about SBA lenders. The SBA qualifies lenders into 3 categories: Preferred (PLP), Certified, and General. The difference has to do with how much flexibility the SBA allows the lender in making the loan.
PLP lenders can underwrite their loans without going to the SBA for approval – although they may, they don’t have to. Certified lenders don’t have as much flexibility as PLPs, but more than General. General lenders submit their loan packages to the SBA for approval. (At Counsel Mortgage we only work with PLP lenders.)
We’ll have more to say about SBA lenders, as well as conventional commercial lenders, in our videos that we’ll start publishing soon on our website. Stay tuned.
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Michael Green is a Commercial Loan Originator for the Counsel Mortgage
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