SBA rule change could boost already surging 7(a)

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Small Business Administration lenders hope a pending rule change will boost already surging originations in the agency’s flagship 7(a) program.

The SBA recently disclosed that it will slash the equity required for most change-in-ownership loans from 25% to 10%, a move that should make financing for acquisitions more accessible. The change is part of a broader overhaul of the standard operating procedure, or SOP, that governs 7(a) and 504, the SBA’s largest lending programs.

While the rewrite has dozens of modifications intended to streamline and improve the SOP, the lower equity requirement “is the big one,” said Gregory Caruso, a partner at Harvest Business Advisors in Princeton, N.J.

The ultimate benefit will hinge on the decisions of bankers and underwriters, though Caruso said the change would have an immediate impact at Harvest, which provides loan valuation and brokerage services. “I have a loan right now that would be difficult to close with a 25% equity requirement, but it will go very well at 20%,” he said.

Several banks, including Live Oak Bancshares in Wilmington, N.C., have been trying to make more change-in-ownership loans. The SBA’s modification covers deals involving intangible assets in excess of $500,000.

Even with the current, higher equity requirement, the 7(a) program has grown in popularity in recent years. In the first six weeks of the SBA’s 2018 fiscal year, which began Oct. 1, the 7(a) program backed loans totaling roughly $3 billion, a nearly 11% increase from a year earlier. Overall 7(a) volume has set records in three straight years, reaching $25.8 billion in fiscal 2017.

An easing on equity standards for change-in-control loans is likely to push the numbers even higher because it meshes almost perfectly with forces that are currently driving the market, said Tom Pretty, head of SBA lending at the $285.4 billion-asset TD Bank.

The new requirement is “a powerful change,” Pretty said. “We have an aging ownership population. … The baby boomers are starting to reach their retirement years, so we’re seeing a lot of entrepreneurs who started successful companies looking for transition plans.”

A recent survey of more than 300 small business owners by TD Bank found that nearly a third sought an SBA loan to pay for an expansion — or an acquisition or partner buyout.

TD Bank has moved to seize that opportunity, investing heavily in SBA lending earlier this year by hiring 70 small business lending specialists. The added capacity helped the U.S. unit of TD Bank Group in Toronto boost SBA production by nearly 40% in fiscal 2017, to $290 million. The bank more than tripled its number of individual SBA loans, to 3,523 in the last fiscal year.

“As you can see in the numbers, SBA has been a great solution for a number of our customers — especially in the past year,” said Pretty, adding that TD Bank is especially enthusiastic about change-in-ownership loans.

“In terms of the business-acquisition space, it’s a space we love,” Pretty said. “It’s a space we want to grow. The SBA is a great product for that.”

The $133 billion-asset KeyCorp has also “capitalized on the boomer trend” while enlarging its SBA operation, said Jim Fliss, the Cleveland company’s national SBA manager.

Change-in-ownership deals are often light on collateral, industry experts said. The 7(a) program helps by offering startups and small businesses guarantees as high as 85% on loans of up to $5 million.

That guarantee “gives banks enough confidence to underwrite the deal,” Fliss said.

Key’s 7(a) originations jumped by 45% in fiscal 2017 from a year earlier, to $322 million, and Fliss said he expects the company to make even more loans in coming years.

“Our pipelines are full, applications are coming in, businesses are moving through the process,” Fliss said. “The next 12 to 18 months look good. … I’m very happy with the way the program is running. It’s a perfect product.”

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