Owners seeking to expand their businesses and entrepreneurs considering new careers are increasingly turning to the Small Business Administration (SBA) to make their visions reality—and are finding it easier to do so.
Business owners are tapping the agency’s legacy 504 and 7(a) loan programs to acquire property, refinance debt or clean up their balance sheet, while a growing number of aspiring owners are sourcing capital to begin their entrepreneurial journeys. In its April release, the SBA reported 17 million new business applications since 2021, up 45% from 2017-2020. For the year ending September 2023, the agency posted record loan volumes and funding of $27.8 billion.
Fueling the agency’s popularity are October 2023 policy changes that simplified loan processes, loosened lending restrictions and extended higher loan limits to borrowers.
“Demographic shifts like the 12 million Americans reaching retirement age between 2024 and 2027 and heightened levels of employee disengagement spell new opportunities for entrepreneurs ready to take the reins of established businesses,” said Cody Porter, SBA business development officer at BOK Financial®.
5 ways SBA lending aims to support borrowers
1. Smaller down payments. Borrowers looking to acquire a business, secure new equipment or expand a facility traditionally had to put down at least 20-25% of the purchase price; under the revised rules, buyers can put down 10%, or even as little as 5% if the seller finances 5% on a full-purchase transaction. So, a $300,000 purchase would require as little as $15,000 from the buyer compared to $60,000-$75,000 on a traditional conventional loan. “With an estimated 60% of business owners aged 60 or older as of 2021, the market is ripe with sellers. This change lowers a buyer’s barrier to entry,” said Porter.
2. Partial acquisitions. For reasons ranging from retirement to estate tax planning, a business owner may not want to immediately sell 100% of their business, which the SBA can now accommodate. “This can be especially helpful when selling to a family member, a longtime associate or a general manager on a multi-year, phase-in basis,” said Porter. “And as little as 0% down may be acceptable, depending on seller guarantees and deal structure.”
3. Easier business expansion. Thanks to relaxed borrowing rules, an operating business can expand into an adjacent type of business with as little as 0% down. So now it’s easier, say, for a lawn-cutting and fertilizing business to “bolt on” a retiring colleague’s sprinkler business. Eligibility is determined by the compatibility of North American Industry Classification System codes.
4. Access to higher loan limits. The $2 million loan size cap in 2010 had grown to $5 million in 2022. And, more loans are reaching the limit: from 97 in fiscal 2012 to 361 in fiscal 2022.
5. Reduced contingency funds required at closing. Borrowers of $350,000+ loans were previously required to pay into a pool known as the SBA Guarantee Fee to help remedy failed loans. The new threshold is $1 million.
“This leaves more capital in the pockets of small business loan borrowers on Day 1,” said Porter. “When you also consider the meaningful reduction in the SBA Guarantee Fee, there hasn’t been a better time for a business owner to consider an SBA product to support their business.”
What lenders look for in borrowers
According to Porter, borrowers should expect to have 10% of the loan amount as cash or other liquid assets on their balance sheet or personal financial statement. The borrower will be expected to provide documented bank, retirement, taxable or mortgage account balances, as applicable. Providing personal and business tax returns from the prior three years is customary.
However, potential borrowers may be surprised to learn that lenders look beyond the financials. For example, the buyer can get credit for experience working in the particular or related industry. Experience in a parallel segment—such as manufacturing, distributing or retail—is also favorable.
“On an acquisition transaction, the lender is looking for business continuity by way of management experience. We want to see borrowers with the requisite skill set to not only run the business but expertise and experience to help grow the business.”- Cody Porter, SBA business development officer at BOK Financial
What borrowers should seek in a lender
While many banks can make an SBA loan, working with an experienced lender can ease and expedite the process, said Porter. “We have a small but outstanding SBA team at BOK Financial, representing over 17 years of experience and $200 million in fundings. We get to work with borrowers in different industries with a variety of business goals and are excited to help each client on their businesses journey.”
Other borrower considerations can include:
- A prior relationship with the lender or loan officer.
- Familiarity or experience with the seller’s industry.
- Competitive, fixed-rate loan pricing.
- An ongoing banking relationship where the lender can provide adjacent financial services including other loans, merchant and treasury services, and lines of credit.
- A lender that makes, keeps and services SBA loans—and does not sell them off.
As the economy continues to recover and grow post-pandemic, the SBA is offering greater and faster capital access to those seeking to join more than 33 million U.S. small businesses.
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