There’s good news for entrepreneurs: Small business lending is hot again.
Since the financial crisis of 2008, small businesses have had a difficult time accessing loans through traditional banks. But with small-business confidence on the rise and a slowly-but-surely improving economy, small-business borrowers are once again front and center on the competitive stage of business loans. Numerous non-bank lenders that are focused on small business have emerged in the past few years, with some lending hundreds of millions of dollars to smaller enterprises every year.
Most importantly, though, the Small Business Administration’s new administrator, Maria Contreras-Sweet, recently announced that SBA loan qualification requirements would be loosened. The changes affect the two most popular SBA programs: the 7(a) program and the 504 program.
Small business lending – making things easier
As of April 21, the SBA made the following changes to two very popular small-business lending programs:
1. Removal of wealth test. The SBA no longer requires a personal resources or wealth test for potential borrowers for both 7(a) and 504 loans. The wealth test was meant to flag wealthy borrowers and potentially disqualify them from participation in SBA lending programs. Applicants were required to provide detailed information about their personal assets. But many small-business owners felt this was too intrusive and were uncomfortable putting their entire financial life under scrutiny just to apply for a small-business loan, so they avoided the SBA loan process altogether.
In practice, the requirement ignored the reality that even entrepreneurs with significant personal net worth might still need financing for their businesses. Many personal assets aren’t liquid, like real estate in a bad market, and aren’t readily available for business use. In other cases, even wealthy owners were unable to obtain funding, negating the thinking that having personal wealth means you don’t need help with your business loan.
2. Revision of collateral requirements on 504 loans. The 504 loan program is designed to assist small-business owners with the purchase of physical assets such as equipment and warehouses. Like the 7(a) program, the SBA offers the lender a guarantee in case the borrower defaults. Before April 21, the only collateral that could be used for the loan was the actual asset being financed. Other collateral was not permitted.
But that’s no longer the case, and the SBA now allows other collateral to be used. For instance, let’s say your business owns a $2 million warehouse and needs to purchase $500,000 in vehicles. Under the new regulations, you can choose to have the warehouse instead of the trucks you’re purchasing serve as the collateral for the 504 loan. This change allows owners to protect their most valuable assets and also access lower interest rates.
