The American economy has slowly been rebounding from a tumultuous period. Between the Federal Reserve fending off inflation by hiking interest rates 11 times between March 2022 and July 2023, five prominent banks collapsing in 2023, and a debt ceiling deal narrowly passing in May 2023, several events powerfully altered the U.S. financial market.
Through everything, the U.S. economy has proven to be resilient, thanks in large part to the nation’s legions of small businesses — companies with less than 500 employees — which make up 99.9% of companies in the U.S. Those companies continue to show their value through the unprecedented ups and downs in the life of a small business.
Naturally, that’s where the U.S. Small Business Administration (SBA) comes into play. The SBA doesn’t make loans directly, but it guarantees the loans for lenders that offer their loan programs. The SBA helps business owners manage their finances, access capital and protect their investments.
This year, the SBA implemented significant changes to further benefit and support American small businesses and help them to keep doors open, the lights on and customers coming. Here is a sampling of some updates that have positively impacted small businesses in 2024.
Loan program changes
One of the SBA’s most popular programs is the 7(a) loan, which can be used for a variety of services, including borrowing working capital, the purchase or refinancing of real estate, property construction or renovation, refinance of debt, acquisition, partner buyouts, purchase of equipment and much more. With a maximum loan amount of $5 million, this program encourages longer-term small business financing.
“Realizing the importance of such loans, the Biden Administration worked with the SBA last year to implement policies aimed at expanding access to capital for small businesses by modernizing SBA’s signature 7(a) and 504 loan programs.”
Realizing the importance of such loans, the Biden administration worked with the SBA last year to implement policies aimed at expanding access to capital for small businesses by modernizing SBA’s signature 7(a) and 504 loan programs. SBA officials announced that the improvements for the loan programs included increasing the ability of small businesses to access funding and grow through a broader network of lenders with streamlined loan procedures.
The updates are important for business owners because the changes contain new guidelines for lenders that update origination policies and procedures. They also have changed the requirements for lender participation and 7(a) loan servicing and liquidation requirements.
The SBA now provides more flexibility in credit criteria for loans under $500,000. This helps crucial financing reach more creditworthy small businesses. Additionally, the administration is upgrading technology, including new data analytics and third-party data checks. They have streamlined information requirements and eligibility determinations, making it easier to know who qualifies for a loan upfront — any detected fraud is expected to be caught in advance and duplicative data entry (such as for business owners using the online Loan Authorization Wizard) is no longer required.
Transparently, the SBA in recent years has received criticism for slow processing time, an excess of paperwork and added headaches for borrowers. With these increased and streamlined loan program improvements, it is a beacon of hope for any small business owner ready to take the leap.
Other policy updates
Beyond the direct changes made to the 7(a) and 504 loan programs, there are several other significant policy changes that will positively impact small businesses seeking capital. For example, the rules have changed around equity injections, or the amount of a business owner’s cash or assets that are part of a business acquisition.
A new SBA standard operating procedure for lending has removed all guidance around equity injections, with lenders now expected to follow their internal policies and procedures for similarly sized, non-SBA guaranteed commercial loans. This latest change provides an updated definition for lenders and borrowers. The new standard eliminates the confusion for business owners and the 10% minimum equity injection requirements for startups. The SBA is now allowing loans for partial changes of ownership, with the seller not being required to provide a guarantee. This now allows for individuals to have an additional $3.75 million of guaranteed money.
Finally, through Sept. 30, the SBA will reduce the annual service fees on certain loans. The SBA fiscal year 2024 annual service fees are based on the gross loan approval amount, including both SBA-guaranteed and unguaranteed portions. In this latest public notice, loans of $1 million and less will have 0.00% of the guaranteed portion of the outstanding balance of the loan. For loans higher than $1 million and up to $5 million, that number is 0.55%. All eligible small businesses will benefit from these changes.
Year of opportunity
Let’s continue to make 2024 the year of opportunity for small businesses. If the past several years have taught us anything, it is that unprecedented times call for resilient measures. Lenders, loan originators and financial experts know that being prepared for anything will help clients and business owners succeed.
Many Americans will take the opportunity to pursue their dreams of being business owners and seek capital support in 2024. Lenders must be prepared to meet the increased demand of these organizations’ leaders, all while navigating and anticipating the challenges and opportunities one can provide for their clients. Originators working with the SBA should plan on informing their referral sources and borrowers about these important updates which can help pave the way for more Americans to find success in the business world.
