New SBA Rules - comprehensive expert guidance

Policy-heavy post incoming! There continues to be a lot of conversation within #smb circles about the U.S. Small Business Administration's new guidance around SBA loans. We spoke with ^redacted‌ a couple of weeks ago on Private Market Labs's Insights series to learn more. She gave us the most comprehensive set of guidance I've seen on the topic to date:

1. One key element of the SBA program changes is the modification to allow partial buyouts. In the past, a buyer using an SBA loan would need to acquire the full business. This new regulation permits sellers and key employees to stay on with the business.

This change allows key employees who own minority stakes in the company to stay on with the company and retain their equity. In situations where key employees were rewarded with equity, under the prior rules, those employees would have had to exit the business.

Partial buyouts also loosen restrictions on businesses in industries with strict licensing requirements. In cases where the seller was the key license-holder within the business buyers without licenses would have trouble making a purchase.

Heather noted that the SBA has rules around key employees, who may need to put up their own personal guarantees if they stay with the business as assurance to the lender. This piece is still up for interpretation, but could have a cooling effect on this front.

2. One change is the potential for using seller rollover equity as part of the down payment. Theoretically, these changes could mean that buyers could purchase a business for 0% down, with seller equity making up the full required 10% down payment.

Heather agrees that it might be possible to buy a bigger business if the seller keeps a large amount of ownership. But she’s unsure if the part of the business that the seller keeps could count as the 10% down payment usually required.

Heather also wonders if it would be possible to get an SBA loan without a down payment, structuring the down payment as a seller note where they don't get paid for two years. However, Heather questioned whether this is in line with what the SBA intended.

Heather talks about a new rule where a seller only pays interest on their loan and the buyer only has to contribute 2.5% of the down payment. However, many lenders might not be comfortable with a deal where the buyer doesn’t put in any cash.

3. Prior to the SBA program changes, individuals with substantial personal liquidity were unable to access the SBA 7a program. This particular restriction has now been lifted, opening the door for those who were previously obstructed due to their high personal liquidity.

4. The new rules loosened restrictions on the use of SBA loans for for-profit religious activity. Non-profits such as churches are still barred from using the program.