More SBA Changes are Coming
Will They Matter to your Office?
By Steve Mariani
I’m finally back from the America East SBA Lenders conference which gathers many of the top-level lenders, service providers and the SBA together to discuss the future of transaction lending. Maybe using the word “discuss” may not be as appropriate as it sounds. It’s more like “this is what will be changing” and other items that we’re “looking into changing” over the next few months. I must first say that many of the SBA 2018 changes have helped our industry to provide more loans to more borrowers buying businesses, and that creates our success. My mission is to always better understand the changes along with the motivation for each specific rule being implemented so we can adjust and utilize these changes to the best benefit of all parties involved in a transaction. Something that sets us apart from most lenders. I also lobby to have older, no longer appropriate, rules removed. Over my 22 plus years in this industry I have witnessed so many rules come and go it’s hard to even remember the rules in place when I began my career. Many of those rules had little to no effect while others had basically shut down the entire system. You may not remember the rule implemented that allowed no more than 250K of goodwill in any SBA loan request, a blatant contradiction to the actual purpose originally put in place back when the SBA 7a loan program was created in the 50’s.
By now you should be well aware of the biggest change for 2018 which is the reduction of the down payment requirements on goodwill transactions. This went from 25% to an SBA required down payment of only 10% as of January 1, 2018. This changed helped us to close additional transactions and should be helping your office also. This change should have greatly increased your pool of buyers for any specific listing.
So, what’s coming in the new rules? There’s not a lot to be upset by, let me start by saying that. They will be reinstating the “personal liquidity rule” in some fashion that has not be decided as of today. This rule requires the lender to determine if a borrower should or should not be eligible for a loan based on their personal liquidity position. The old rule, as an example, stated that if a borrower has 2 times the loan amount in cash or cash positions after injecting their down payment then they would have been “ineligible” for SBA funding without increasing their down payment. It was a bit more complicated than that, but you get the idea. What it will look like when it actually becomes a new rule, who knows.
There’s actually a rule being discussed that does have us more concerned than the personal liquidity rule which is the “minority partner concern”. This one basically makes us prove that any minority partners (owning less than 20% of the new entity) involved in the loan is not relied upon for any daily management or control of the company’s operations. These partners must be proven to be “passive investors” in the new business. If the lender suspects they have a true role in the operation, then they must require more information from this minority partner and possibly a personal guaranty. If you are structuring applications to submit directly to any SBA lender you must be sure you address this one if partners are included. Although this may not become an actual written rule the talk is to be on the lookout for these partners and document the file supporting the position your taking. They are either passive investors or directly involved in operations with no grey area in between.
The last of the changes that I think you should be aware of is all good. If you know what an SBA Form 912 is then you’ll completely understand this one. For those unfamiliar with this SBA form I will explain just briefly the question on it that matters to us. Have you ever been convicted of a criminal offense aside from a minor motor vehicle violation? Typically, a yes response would trigger a slew of additional questions, especially if it was a felony and many times would demand the application be now sent to SBA directly for clearing of these offenses prior to the lender underwriting completion. As of today the lender now has the authority to waive the submission to SBA on any and all misdemeanors no matter when they occurred or how many a borrower might have. Felonies will still need to go directly to SBA which could add up to 12 weeks of processing time to an application. This change allows more lender discretion on character concerns and takes another possible roadblock out of the way, a great change for our industry.
Bottom line in all this, SBA is on a path to continue the growth of small business across America and is obviously more focused on our success so let’s capitalize on this and strike while the iron is hot. We all know that lenders come and lenders go, but if you are not closing at least 94% of your received lender term sheets then it may be time for a change. Give us a try and learn what real customer service looks like. Diamond Financial has been building broker success since 1996 and only provides loans to broker included transactions.
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