Industry Market Trends

Can New SBA Rules Help Small Business Borrowers?

Mar 21, 2013

The U.S. Small Business Administration is overhauling several of its guidelines to loosen requirements and cut red tape for obtaining credit. The reforms are intended to attract more small businesses to the agency's loan services.

The Small Business Administration (SBA) feels that not enough companies are using its help to secure government-guaranteed loans and is determined to ramp up its efforts by altering its lending rules to make the agency's loan programs more accessible and popular.

The SBA doesn't actually lend any money itself, but its guarantees help commercial lenders take chances on small business borrowers who might not otherwise qualify for loans. In the event a borrowing company does not repay their obligation and a payment default occurs, the government will reimburse the lender for its loss, up to the percentage of SBA's guaranty. Under this program, the borrower remains obligated for the full amount due.

According to, the proposed changes to the 504 and 7(a) loan programs "will streamline the application process and improve access to financing for small business borrowers."

The 504 loan program provides long-term fixed asset financing to small businesses that can be used for buying or improving land, buildings or equipment, while the 7(a) loan program assists small businesses with getting credit.

A frequently cited reason for companies' reluctance to pursue SBA loans is that simply applying for them involves a great deal of time and red tape. According to Fox Business, then-SBA Director Karen Mills said at the end of February that the agency is aware of the complaints: "The changes are the latest steps to reduce the paperwork burden, with our eye on the larger goal of expanding access to capital and giving entrepreneurs and small business owners the financial resources to grow and create jobs."

Mills told the New York Times that the agency is trying to be more "inclusive" in doling out assistance, and the recent changes are aimed at "making more existing businesses eligible for the agency's programs. Many of these businesses would have been too large to get an SBA-backed loan just three years ago."

The SBA highlighted six key points among the proposed reforms: eliminating the personal resource test, revising the rule on affiliation, eliminating the nine-month rule for the 504 loan program, increasing accountability of the Certified Development Companies' (CDC) Board of Directors, removing unnecessary CDC operational requirements, and other provisions to refocus CDC operational and organizational requirements. CDCs are the community-based partners for providing 504 loans.

Relaxing the affiliation rules in particular will greatly ease the paperwork burden. However, these rules were intended to ensure that a large corporation doesn't set up a "small business" affiliate for the purpose of acquiring government-backed loans it wouldn't otherwise qualify for. So the SBA isn't going to be as concerned about how large the minority stakeholders in a candidate company are.

Mills said that frankly, it doesn't make sense for large corporations to attempt to circumvent such regulations because a large corporation would qualify for a market loan anyway, and since the SBA loans are more expensive than conventional loans, "Why should you pretend to be small?"

As an example, Mills explained that under the old regulations, if a gas station with three owners applied for a loan, "we required 28 tax returns, because we said we wanted three years of tax returns of every individual who owns 20 percent or more, and then for each of those individuals, we wanted tax returns for other entities they owned."

But under the proposed changes, "businesses with no clear majority owner would simply have to sign an affidavit identifying all of their affiliates" and only provide their own tax returns, not any for affiliated businesses.

The definition of "small business" has also changed. Today, businesses with a net income of $5 million or those with $100 million in revenue and a 5-percent profit margin could apply for an SBA-backed loan even after accounting for all of their affiliations.

Relaxing the rule, then, may entice some companies that were legally entitled to seek loans since 2010 but found the affiliate issue too cumbersome to follow through on the process. Mills called the proposal her agency's latest effort to streamline and simplify its programs.

Of course, as Gaebler notes, any application will still need "a solid business plan, detailed financial records, and an adequate amount of collateral."

SBA spokeswoman Emily Cain said that by law the SBA is allowed to approve $22 billion in loans in 2013 - although the SBA rarely comes close to meeting its loan-guarantee limit in a given year.

"However," Cain added, "unless the sequester is addressed, the agency is unlikely to have the money to approve more loans this year...the amount of lending it can guarantee could fall by about $900 million."