The Small Business Administration is changing its programs to make it easier for small companies to access two government-guaranteed loan programs. The SBA’s final rule, which goes into effect April 21, will expand eligibility to the 7(a) and 504 programs. Companies use 7(a) loans to expand or finance working capital and 504 loans to purchase fixed assets such as equipment or real estate.
As CFO reported in May 2013, the SBA will eliminate its “personal resource” test, which currently determines how much collateral a company needs to receive a 7(a) or 504 loan. The current rules require any person with 20 percent or greater ownership in a borrower and personal resources within a certain range to take on additional equity in the company.
At the time, Jeanne Hulit, associate administrator for capital access at the SBA, explained that the rule forces a change in ownership structure for no reason. “We feel we need to create more opportunities for investing in small businesses and not discourage that investment by saying somebody with personal net worth over a certain amount has to own more of the business than they intended because we have this arbitrary formula,” she said.
The new rule will do away with that restriction. The SBA will still allow individual lenders autonomy; it won’t stop a bank or other lender from requiring an owner to pledge assets as collateral, for example.
Among other changes, the SBA will also eliminate its nine-month rule, which currently allows a business to include only expenses it incurred over the prior nine months in its 504 loan application. Instead, owners will be allowed to include any qualifying expenses for a project, regardless of when they occurred.