Small business loans are hard to come by these days. Not as hard to come by as they were during the recession, but still more elusive than before the economy collapsed.
The Small Business Administration just tried to make it a little bit easier.
The agency, which supports billions of dollars in small-business lending each year, on Monday implemented several new rules easing and eliminating some of the restrictions on its most popular loan programs. In large part, the revisions are meant to simplify the application process for small-business borrowers and give banks more flexibility in the way they structure their loan products.
Most of the changes will affect the agency’s 7(a) and 504 loan programs. The former is the SBA’s most basic loan offering, in which a bank generally provides all of the financing, while the agency pledges to pay back a certain portion in the event the borrower defaults.
Meanwhile, 504 loans, which are intended for real estate or machinery purchases, consist of financing split between a bank and a Certified Development Company. Regulated by the SBA, CDCs are nonprofits that raise their share of funds by buying government bonds.
Ann Marie Mehlum, who heads the agency’s office of capital access says her team is changing some of the rules in an effort to “expand program eligibility and improve access to capital for small businesses.” More small business loans, agency officials say, should translate into more small business jobs and a stronger economy.
So what’s new? Here’s a primer on the changes for small businesses.
No more wealth test
Until now, the SBA required loan applicants to disclose information concerning their individual wealth and personal assets, hoping to weed out employers who already have plenty of financial resources at their disposal and thus shouldn’t need government help to secure a loan.
However, noting that even businesses with wealthy owners can find it difficult to secure a commercial loan, the agency is throwing out that “personal resources” test. Moreover, officials have said that few loan applicants were actually turned down based on that rule, making it more of an administrative hurdle than a practical rule.
Under the 504 program, banks have only been allowed to take as collateral the very property or equipment the loan was intended to finance. If a business owner borrowed money to buy a new fleet of trucks, for example, those trucks had to be the collateral.
Starting Monday, that’s no longer the case. Now, business owners can put up other forms of collateral, be it another physical asset or expected payments, to secure a 504 loan, which could help them secure better terms and lower interest rates on those loans.
More time to organize
Staying with the 504 program, borrowers were previously allowed to include project expenses going back no earlier than nine months before the SBA received their loan application. If you purchased permits to build a new warehouse a year before securing the 504 loan, for example, that expense could not be covered by the loan.
Of course, that limited the amount of time business owners had to organize and get started on a project before they decided whether to pursue an SBA loan. And with some permits and approvals taking several months or even years to secure, that can be tricky.
That rule has now been nixed, too. As long as an expense is tied to the project for which a company secured the 504 loan, the loan can cover it, no matter when it was incurred.