New SBA rule changes are here. See what they mean for you
The U.S. Small Business Administration has long been concerned about small businesses from underserved markets struggling to obtain SBA loans.
On May 11 and 12, the SBA enacted a series of changes to the SBA programs that will expand which lenders can get licensed for SBA programs, establish new opportunities through Community Advantage nonprofit lenders and update the criteria and underwriting processes to streamline documentation.
“Modernizing and expanding SBA’s lending programs will open new opportunities to our highly entrepreneurial, yet underserved communities that have far too long been denied access to the funding they need to create jobs and grow our economy,” U.S. Small Business Administrator Isabella Casillas Guzman said in the SBA’s press release.
The new rules seek to widen access to government-backed small business loans, especially for minority-, veteran- and women-owned businesses.
Key takeaways
- New lending criteria should help more small businesses qualify for an SBA loan
- Community Advantage lenders can permanently expand serving minority communities
- More non-bank lenders can offer SBA loans, expanding access to funding for underserved businesses
- Lenders will save time on loan documentation, providing a more efficient path to approving SBA loans
What are the new SBA rule changes?
In April, the SBA finalized two new rules that revise several loan program regulations. The first rule change impacts SBA affiliations and lending criteria and was published in the Federal Register on April 10, 2023. The second rule change was published in the Federal Register on April 12, 2023, and makes changes to the moratorium on licensing new Small Business Lending Companies.
Here’s a closer look at the major changes that are set to take place in May.
More non-bank lenders can apply for a license, including fintechs
In addition to getting an SBA loan from a bank or credit union, the SBA allows a limited number of non-depository institutions to offer SBA 7(a) loans. These lending institutions are known as Small Business Lending Companies (SBLCs)
For 40 years, the SBA has capped the number of SBLC licenses to 14. To become an SBLC in the past, a lender had to purchase one of the 14 licenses from an existing SBLC license holder, who would then exit the program and give up its right to offer SBA 7(a) loans. But the SBA will lift this cap and allow new financial companies to apply for the license.
For now, the SBA only plans to add three new SBLCs but estimates that one newly licensed SBLC could make 425 new loans over the next four years, increasing access to these affordable loans.
Fintech company Funding Circle applauded the change, believing it will “help expand access to capital for America’s smallest and underserved businesses.”
The SBA adds a new type of lender: Community Advantage lenders
The SBA will create the Community Advantage SBLC license, which equips nonprofits and mission-oriented lenders who wouldn’t otherwise qualify for SBA lending. These lenders focus on underserved markets, including startups, veteran- and women-owned businesses. CA lenders also work in rural and low-income communities.
Currently, for-profit and non-profit Community Advantage lenders provide SBA loans to business owners in underserved markets. But these lenders have worked under the Community Advantage pilot program, which was temporary and set to end in 2024.
Lenders who currently participate in the pilot program will transition into the new program and receive a non-temporary license, allowing them to continue to operate without an expiration date.
While lenders transitioning over to the new program can be for-profit or nonprofit, new applicants who participate in the program must be nonprofits to qualify.
The transition to the Community Advantage SBLC license will allow lenders to continue to offer the SBA Community Advantage loan. This is a type of SBA 7(a) loan with a lower maximum loan amount, but it has more relaxed eligibility requirements.
Lenders will consider fewer factors to qualify for 7(a) and 504 loans
To qualify for an SBA loan, a business must be considered creditworthy and reasonably able to repay the loan. The SBA currently considers nine factors to determine creditworthiness:
- Ability to make loan repayments
- Character and credit history
- Collateral
- Experience
- Invested equity
- Past and future business financial statements
- Potential that the business will succeed
- Strength of the business
The new rule whittles down the credit criteria to three factors:
- Credit score or credit history
- Earnings or cash flow of the business
- Collateral
The new criteria mean more small businesses may qualify for an SBA loan based on objective factors rather than factors like character that can be up for interpretation by the lender.
If you can’t qualify for the SBA 7(a) or 504 loans, SBA microloans offer funds up to $50,000. Like the SBA Community Advantage loan, eligibility requirements are not as strict.
Why the SBA rules are changing
The new SBA rules are meant to boost access to capital for small businesses in underserved communities that traditionally get denied credit based on their current qualifications.
The rule changes seek to accomplish this goal by:
- Expanding the number of lenders who can process SBA loans
- Helping more businesses qualify under less restrictive credit criteria
- Streamlining loan applications to serve lenders and small businesses better
- Each year, men consistently receive more than 70% of SBA 7(a) and 504 loans
- Veterans consistently receive less than 4% of SBA 7(a) loans and less than 3% of 504 loans
- Minority small business owners consistently lag behind white small business owners who typically receive over 40% of 7(a) and 504 loans
When the new SBA rule changes took effect
Different aspects of the new SBA rules took effect on May 11 and 12, 2023.
May 11, 2023
The SBA updated the lending criteria and regulations for SBA 7(a) and 504 loans, including:
- Factors considered
- Loan conditions
- Reconsiderations
- Affiliation standards
- Using funds for partial changes in ownership
May 12, 2023
- The SBA lifted the moratorium on Small Business Lending Company (SBLC) licenses, allowing new non-bank institutions to apply.
- It created the Community Advantage SBLC to license nonprofits and mission-oriented financial institutions.
- The SBA removed the current Loan Authorization document from the 7(a) and 504 loan programs.
Bottom line
The SBA is upending its current regulations for new Small Business Lending Company licenses, approving borrowers under new lending criteria and streamlining the loan authorization process to take advantage of lenders’ expertise and current technology.
It will also focus on helping underserved businesses through new Community Advantage lenders, allowing nonprofits and mission-based lenders to apply for a permanent license.
If you’re ready to learn more about getting an SBA loan, get matched with an SBA lender to answer your questions. Keep in mind that you’ll need to show that you’ve exhausted other business loan options to qualify for an SBA loan.
Frequently asked questions
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The SBA has not proposed a minimum credit score requirement for SBA loans. Some lenders were concerned that a minimum credit score was part of the new lending criteria.
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If you default on your SBA loan, the SBA can take steps that work similarly to defaulting on a conventional business loan. You’ll receive a demand letter notifying you of your default status. If you don’t respond, the loan will get sent to collections by the U.S. Treasury Department, and your collateral can be seized to pay off the debt.If you own at least 20 percent of the business, you also provided a personal guarantee, meaning your personal assets can be seized. It’s best to work with your lender on deferring payments, modifying the loan or settling the loan before it goes into default.
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