Navigating the Evolving Landscape of SBA Lending: Insights from the 2024 Getting The Deal Done Conference

Last week I shared a Recap: 12 Key Strategies for Business Growth.  This week, prior to transitioning to some additional strategies for compounding growth and accelerating profits, I wanted to share a bit of SBA news that I gleaned from a recent conference.

The world of Small Business Administration (SBA) lending is ever-changing, and staying abreast of the latest updates and strategies is crucial for lenders, buyers, and sellers alike. The 2024 Getting The Deal Done Conference, sponsored by Live Oak Banking Company, provided a wealth of information on the current state of SBA lending and practical advice for navigating the complexities of business transactions in this dynamic environment.

John Randall, the National Sales Manager for SBA General Lending at Live Oak Bank, shared his observations on the current market. He noted the increased difficulty in bringing together buyers, sellers, and lenders, largely due to rising interest rates and their consequences on borrowing power. Despite these challenges, the SBA has made significant improvements over the past year, facilitating larger transactions and providing more opportunities for businesses to thrive.

The conference highlighted the impact of interest rate increases on borrowing power. A detailed analysis showed how the prime rate’s rise from 3.25% to 8.50% between March 2022 and July 2023 led to a decrease in the maximum loan amount from $5,281,552 to $4,199,553. This stark reduction underscores the importance of strategic financial planning for businesses seeking loans.

In response to these challenges, the conference presented several options for businesses to consider. These included increasing buyer cash injections, utilizing full standby seller notes, selling only a portion of the business, considering price adjustments, waiting for rates to drop, and exploring creative performance-based seller notes with a bank comfortable with the arrangement.

Live Oak Banking Company’s position as a leading SBA 7(a) lender was evident, with a consistent percentage of total approvals ranging from 5.8% to 6.7% from 2019 to 2023. This track record demonstrates their expertise and commitment to supporting small businesses through SBA lending.

The conference also provided a recap of recent SBA changes, highlighting the importance of staying informed about new Standard Operating Procedures (SOPs). Notable changes included the elimination of the Personal Resource Test, allowing for a more streamlined application process, and the introduction of new rules for equity injections, ESOPs, and partial changes of ownership.

One of the most impactful changes was the adjustment to the equity injection requirements. For complete change of ownership, the SBA now requires a minimum equity injection of 10% of the project amount. Seller notes have become acceptable sources of equity, provided they meet certain conditions, such as being on full stand-by for no less than 24 months.

ESOP lending saw significant changes as well, with no equity injection required for loans made for an ESOP to acquire a majority ownership interest in a small business. This opens up new avenues for employee ownership and business succession planning.

The SBA’s approach to partial changes of ownership has also evolved. Loans can now fund partial ownership changes through stock sales or redemptions, with certain guaranty requirements and equity injections in place.

Another major shift is the elimination of the Personal Resource Test, which previously required applicants to demonstrate that the funds requested were not available from personal resources. This change simplifies the application process and removes a potential barrier to obtaining SBA loans.

The SBA guarantee cap has also been updated, now driven by affiliation and NAICS codes. This allows individuals to have an additional $3.75 million of guaranteed dollars for acquiring businesses in different subsectors, encouraging diversification and growth.

Home equity has become a more accessible source of equity injection, with the SBA allowing borrowers to use home equity loans or refinances to fund their equity contributions. This change provides greater flexibility for borrowers in leveraging their assets.

The conference also showcased combination financing as a strategy for business acquisitions, blending SBA 7(a) loans with conventional loans to finance larger transactions. This approach can provide up to $9 million in combined financing, offering competitive interest rates and terms tailored to the acquisition’s needs.

In conclusion, the 2024 Getting The Deal Done Conference shed light on the evolving landscape of SBA lending. With interest rates impacting borrowing power and new SBA SOPs offering fresh opportunities, businesses and lenders must adapt to these changes. Live Oak Banking Company’s expertise and leadership in SBA lending provide a guiding light for those navigating these waters. As the SBA continues to support small businesses, staying informed and flexible will be key to successful transactions in this dynamic market.

As always, if you haven’t already, I encourage you to download our comprehensive guide, “12 Habits of Highly Profitable Businesses.” This resource outlines strategies that have compounded growth and accelerated profits in numerous businesses worldwide.  When implemented, we commonly see returns of $100K-$500K within the first 12 months of working together.  Some of our best clients double their profits within the first 13 weeks of working together.

As mentioned last week, there are far more than 12 strategies.  Next week, we’ll begin to delve into some additional strategies beyond the 12 key strategies covered to date.

Thank you for your continued engagement, and I wish you a successful week ahead!