Here we, explain how a recent rule change in the Small Business Administration (SBA) 7(a) loan program has significantly increased opportunities for entrepreneurs to obtain funding. Previously, borrowers were limited to $5 million in total SBA-backed loans, but the new rule allows them to borrow up to $5 million per business in different industry subsectors. This change has opened the door for entrepreneurs to acquire and grow multiple small businesses, although it requires a strong financial track record. The article also highlights the challenges and benefits of this shift in policy.
Main Ideas:
- Significance of SBA 7(a) Loans:
- The SBA 7(a) loan program is a popular financing option for small business acquisitions, offering lower risk for lenders due to the SBA’s 75% guarantee.
- It has favorable terms, including long repayment periods and minimal down payments.
- Rule Change on Loan Cap:
- In May 2023, the SBA revised its “affiliation rule,” allowing borrowers to access up to $5 million per business, as long as each business falls into a different NAICS subsector.
- This effectively removes the $5 million total cap on SBA loans, potentially enabling entrepreneurs to build diversified business portfolios.
- Implications of the New Rule:
- The change brings the SBA’s lending criteria closer to the definition of a small business as independent and not dominant in its field.
- This shift enables more ambitious entrepreneurs to grow multi-business empires, while still maintaining protections against large businesses exploiting the program.
- Industry Reactions:
- Small business lenders and advisors were initially skeptical, but the rule change has been welcomed as a means to finance multiple businesses more easily.
- Some, like Ray Drew and Stephen Speer, have already seen successful implementation of this new rule, helping their clients obtain more funding.
- Challenges and Limitations:
- Despite the relaxed loan cap, borrowers still need strong credit and a proven track record to qualify for more than $5 million.
- Not all lenders are immediately on board with this change, and some warn against viewing diversification as the optimal approach for all small business owners.
- Potential Future Developments:
- Some industry experts expect the $5 million loan cap to be raised in the future, but for now, the affiliation rule change is seen as a beneficial move.
- The trend toward acquiring rather than starting businesses may drive further changes in the SBA’s lending framework.
