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The landscape of SBA loans has undergone significant changes, bringing about exciting opportunities for the funeral home and cemetery profession. Equity injection requirements have been revamped, simplifying procedures and guidelines, and allowing for the 10% equity requirement to be totally met with a seller carry. The SBA has also reduced red tape and clarified affiliation standards, providing fair access to capital. Furthermore, the personal resource test has been eliminated, and lending criteria for creditworthiness have been streamlined. In this blog, we will explore how these changes impact funeral home and cemetery owners, highlighting the benefits and opportunities they bring.
Rules have changed around equity injection
Equity injection is new cash or other acceptable assets added to the project that is not on the borrower’s balance sheet prior to the equity injection. The most important element of this (especially for 1st time buyers) is the equity requirement contribution change. The equity requirement is still 10%, but it can now be totally met with a seller carry note. The only caveat is that the seller carry note must be on 24-month standby, meaning the payments begin on the seller’s note in month 25 after the loan is funded.
Previous to June 9th, the buyer must provide 5% of the equity injection. The remaining 5% could be a seller carry but it was on standby for the full life of the SBA loan. This change eliminates a significant barrier to a first-time buyer or key employee who is capable of operating a funeral business but does not have the financial resources to fund the equity injection even at 5%.
Additionally, through this new guidance, the SBA has reduced the amount of documentation that lenders must collect to verify equity.
SBA is now allowing loans for partial changes of ownership
SBA loans can now be used to fund the purchase of a portion of one or more owner’s interest in the business. Partial business acquisitions are now eligible through SBA loans, creating opportunities for deal structures that benefit all parties involved. Additionally, for partial changes of ownership, the selling owner is allowed to “remain as an owner and involved in the day-to-day business, including as an officer, director, key employee, or employee.”
Reducing Red Tape
Recognizing the need for efficiency, the SBA has eliminated the requirement for a Loan Authorization, a set of forms that were redundant and unnecessary for lenders. By cutting this bureaucratic red tape, the application process becomes more streamlined and hassle-free for both lenders and small business owners.
Clarifying Affiliation Standards
To alleviate the burden on small business owners and lenders, the SBA has simplified and clarified the affiliation standards. The SBA removed the principle of control of one entity over another from its affiliation consideration, which is used to determine whether the business is considered “small”. These updated standards provide clear guidelines on who qualifies for an SBA loan, ensuring fair access to capital.
Personal resource test is eliminated
SBA Lenders no longer need to consider the personal resources of the loan applicant when applying for SBA loans. Historically an applicant for a business loan had to show that the funds requested were not available from personal resources, meaning all the borrower’s usable liquid assets were reviewed. Under the new rule, SBA lenders are not required to evaluate the personal liquidity of the applicant during the review process.
Lending criteria for creditworthiness streamlined for loans under $500,000
SBA streamlined its lending criteria for loans under $500,000 by relaxing the amount of due diligence and documentation lenders must use in determining creditworthiness and reasonable assurance of repayment. Ultimately each lender will determine a process for handling loans of this size. Lenders can now use any of the three specific criteria individually or any combination of the three specific criteria when approving loans: (a) The credit score or credit history of the applicant (and the Operating Company, if applicable), its associates, and any guarantors; (b) The earnings or cashflow of the applicant; or (c) Where applicable, any equity or collateral of the applicant.
Refinancing business debt has been simplified
The new guidance streamlined rules around loans that are eligible to be refinanced, making it less cumbersome for a lender to refinance its own debt and the debt of another lender.
Insurance requirements changed
The requirements for life insurance and hazard insurance are up to a bank’s internal policies. Life insurance is no longer a requirement for 7(a) and 504 loans, and the decision to assign a policy as collateral is left up to lenders. Hazard insurance is no longer required for loans under $500,000 with the exception of real estate collateral.
Continued Updates and Initiatives
The SBA remains committed to ongoing improvements and initiatives to enhance capital access for small businesses. In the near future, the SBA will accept new lender applications in the Small Business Lending Company (SBLC) program, enabling the program to extend loans to a greater number of small businesses. Furthermore, additional simplified lender guidelines on participation, servicing, and liquidation will be provided, making it easier for lenders to engage in SBA lending activities.
The Foresight Companies is a transaction and advisory services firm serving the funeral and cemetery profession. We are dedicated to leveraging our expertise in operations, financing, mergers, and acquisitions to drive our client’s success. For more information get in touch with us via our contact us page or call us at (800) 426-0165.
Sources:
https://resources.liveoakbank.com/blog/sba-sop-guide
https://www.bankrate.com/loans/small-business/sba-rule-changes/