New SBA Rules = New Opportunities

Written by David Madison


The SBA has released rule changes that are scheduled to go into effect on January 1, 2018. Big changes are coming that will have a direct impact on how your deals can and cannot be structured. This article is the first of our series that will tell you what you need to know so that you can take advantage of the opportunities while not falling into unforeseen traps that can derail your transactions.

The SBA rules revisions cover lots of ground, and most of the changes are technical or institutional in nature. We’ll move past those and examine just the changes that will impact you and your transactions:

  1. The SBA will require an equity injection of no less than 10 percent of total project costs. Seller debt may not be used to meet this requirement unless it is on full standby for the life of the SBA loan. Seller debt, even after the buyer has injected the 10%, must still be treated as debt and not equity, and                                                                                                                           
  2. Transactions with over $500,000 of intangibles will no longer be treated differently, with different equity injection requirements, than transactions under that threshold. The SBA’s 10% equity rule applies to every transaction regardless of sale price, loan size or intangible amount.

The rules look simple. But, each lender will then have to integrate the SBA’s rules with their lending policies, and that is likely to that’ll create confusion on all fronts. This will likely cause the failure of some good transactions that should otherwise be successfully closed and funded.


We strongly believe that it is vital to control your transactions and the financing process, and this will be even more the case as the new rules come into play. Lenders will be driven more than ever to structure your transactions to suit their needs. Don’t let them. We expect to see lots of case-by-case lending that creates policy on the fly. That can be either good or bad, depending on who the players are and how that process is controlled. Borrowers going to banks directly as a “one-off” will be the prey of the lenders, even more than they are now. On the other hand, respected intermediaries with solid, high volume on-going relationships will be in the best position to shape things properly. As always, we’ll partner with you to build a structure that works for your buyer and seller and then we’ll bring in one of our lenders who will do the loan our way.


Now an important point that we alluded to above… The revised rules cover just the SBA’s minimum requirements. Those are the rules that everyone must follow at a minimum. The lenders then apply their own credit policies on top of the SBA’s rules. Lender credit policies can match or stricter than the SBA’s rules, but never softer or less demanding. This distinction, between rules and credit policies is one that must be fully understood by everyone in a deal.  If not, it is bound to create great confusion and disappointment.


We have already started talking with our lenders about the new rules and how they may adjust their credit policies in response. We expect to see a fair amount of inconsistencies even within how individual lenders respond on a case-by-case basis, with many lenders clamping down on their deal structures and becoming more conservative. We also believe that intermediaries who bring a large volume of high quality loans to their lenders will be in the best position to deliver to their clients the best, most advantageous deal structures that come as close as possible to the SBA’s new rules.


Now that we’ve set the broader context, let’s get into the new rules. The first thing you’ll see is that the focus is strictly on the buyer’s equity injection. Seller notes no longer count towards the minimum equity requirement unless the seller is willing to wait until the buyer fully pays off the SBA loan (and we don’t expect to see a whole lot of that happening). Two things to note here:


  1. The SBA will require the borrower to inject at least 10% of the total project cost; and
  2. It’s an open-ended question how each lender will treat seller financing. For example, will they count the payments against the debt coverage ratio? What if the seller note is on standby, and if so, for how long? By placing the full burden of the 10% equity injection squarely on the shoulders of the buyer, lenders could as a matter of credit policy adjust how they view seller subordinated debt and its place in a given transaction.


The above is loaded with potential opportunities for a lender to structure your deal. Or should we say “strangle” your deal instead? We’ll get into those questions in our upcoming newsletters.


Let’s wrap up with a simpler change but one that may still lead to challenges:


Note the term “project cost” or “total project cost.” A buyer’s equity injection typically used to be based on the selling price of the business. “Project cost” can be found in the current SOP’s but seems to be rarely used. Going forward, it will be the basis for determining the required equity injection in pretty much every transaction.


Project cost is the sum of the price of the business, plus working capital, plus closing costs including the SBA guarantee fee, seems straightforward. But here’s the rub – – when the buyer looks to the lender to add an abundant amount of working capital into the loan, that request will come with a corresponding larger equity injection requirement. It may not be a concern for some buyers, but it will be for the many that are coming into the deal without extra cash to invest into the transaction. We’ll help your buyers navigate this so that they end up with the best possible outcome with this important deal structuring element.


As you can see, there is a lot going on here. We’ll be working hard with our lenders to better understand and help shape things as the new rules go into effect in the coming weeks. If you are working on a transaction and aren’t sure how the new rules apply, please give us a call and we’ll be happy to help you. And, make sure to check out our upcoming newsletters as we dive deeper into all of this and explore how you can get more of your deals successfully closed. is always available for specific questions regarding this or other SBA rules.