The Small Business Administration is changing some of its lending rules to expand access to its two main programs.
The new requirements for the 7(a) and 504 loan programs were published on the Federal Register and will become effective April 21, according to the agency's Monday press release. Small businesses use 7(a) loans for a wide variety of purposes, while they typically take out 504 loans to buy, build or renovate real estate.
Two of the most noteworthy changes under the SBA's final rule will expand the number of applicants who qualify for SBA loans and the expenses that loans can cover.
The SBA is getting rid of the personal resources test, which refused loans to borrowers with cash and other liquid assets deemed sufficient to obtain non-federal financing. The SBA "has become concerned that even borrowers whose principals have significant personal resources may be unable to obtain long-term fixed asset financing from private sources at reasonable rates," the agency said in a rule proposal issued Feb. 25.
The SBA is also eliminating a rule that restricted financing for 504 loans to expenses incurred no more than nine months before small businesses submitted SBA loan applications. The SBA frequently grants exceptions to this requirement because "the date the expense was occurred is a poor indicator as to whether the expense was directly attributable" to the project, according to the agency's proposal.
This point has become particularly relevant in the aftermath of the economic downturn, which forced many small businesses to put projects on hold. Some small businesses that are only now applying for SBA loans have eligible expenses dating back several years, the SBA said in its proposal. Eliminating the nine-month rule "allows businesses a longer timeframe in which to organize and initiate their small business project," according to the release.
The SBA highlighted two other important changes in its final rule.
SBA Certified Development Companies, or nonprofits authorized by the SBA to package and service 504 loans in their communities, will be required to increase corporate governance "to ensure more board accountability and to reduce risks to the SBA portfolio," the release said.
The SBA also revised the requirements for third-party lenders who participate in 504 loans, which are typically collateralized by a second lien on the project property. If the third-party lender takes out collateral in addition to the property and the SBA loan later sours, the lender "must apply the proceeds from the sale of... additional collateral to the balance outstanding on the third party loan prior to the application of proceeds from the sale of common collateral," according to the proposal. The change aims to increase the amount of money that the SBA and certified development companies can recover from loan defaults.