SBA Procedural Notice SOP Update 2023

SBA Procedural Notice 2023

The SBA has published updates to the Standard Operating Procedures manual replacing SOP 50 10 6 with SOP 50 10 7.  These updates will become effective August 1, 2023.  There has been much debate when and how lenders will implement these updates. The short answer is we’ll have to wait and see.

For now it’s enough to understand the enormous changes that have taken place and how searchers, entrepreneurs and business owners will benefit.

The reason I’ve waited to publish this information on The MY SBA Loan Pro Podcast until now is to let the dust settle and provide feedback from real world scenarios.

This episode will focus on the following updates:

• The “So Called” Long Winded Statement
• A Standard Loan Vs a Small Loan
• Full Change of Ownership 
• Partial Change of Ownership
• Franchise Directory
• Personal Resource Test
• Life Insurance

I cannot emphasize enough the overwhelming opportunity that now exists for all future SBA loan applicants. If you were on the sideline or shut out due to a lack of personal liquidity or too much, it’s time to get back in the game!

The “So Called” Long Winded Statement

The SBA cites dozens of references directing SBA PLP lenders to “Evaluate, process, close, and disburse their 7(a) loans using the same reasonable and prudent practices and procedures that the Lender uses for its similarly-sized, non-SBA guaranteed commercial loans”

Instead of incorporating this statement in future SOP updates, the SBA has provided a new and improved statement which is to encapsulate the aforementioned statement.  Here it is, “Do What You Do.”

Due to the ambiguous nature of this statement, the SBA defines what this statement means and as you guessed, it means that SBA PLP lenders are to “Evaluate, process, close, and disburse their 7(a) loans using the same reasonable and prudent practices and procedures that the Lender uses for its similarly-sized, non-SBA guaranteed commercial loans” 

Even though I’ve made light of this seemingly frivolous update it does cause further ambiguity for lenders attempting to interpret and implement SOP guidelines.  To date, this ambiguity has caused both further tightening by historically conservative lenders and loosening by historically liberal lenders and lenders new to the game who are looking to make a splash with the SMB community.  

A Standard Loan Vs. a Small Loan

Prior to this Procedural update there was a sort of no man’s land between loan amounts less than $350,000 but more than $500,000.  From time to time I would run into these opportunities with no real answer.  I couldn’t send them to Micro-lenders due to them exceeding the $350,000 limit or Standard lenders who are not incentivized to originate these small loans.  However, now it’s perfectly clear what constitutes a Standard Loan above $500,000 and a Small Loan under $500,000.   More importantly lenders can apply a streamlined approach to loans under $500,000 which will incentivize them to make these loans, broadening the pool of lenders and subsequently access to capital for borrowers seeking smaller loan amounts..

Full Change of Ownership

Recently the SBA permitted business owners selling their company in an arms length transaction to contribute up to 5% toward the buyer’s minimum required 10% equity injection by carrying a seller note on full standby for up to 10 years.  Though this was a huge benefit at the time and did help get many acquisitions over the finish line, as you can imagine older sellers were less than enthusiastic waiting 10 years to be fully compensated from the sale of their company.  

SOP 50 10 7 holds firm to the 10% minimum buyer equity injection but decreases the seller note standby period from 10 years to 2 years.  Further, cash flow permitting the seller may be enumerated immediately on an interest only basis and instead of being able to contribute 50% of the buyer’s equity injection, they may contribute up to 75% of the buyers equity injection. 

This update further enshrines 0% equity injection for business expansions defined as an existing business acquiring another business that is in the same 6 digit NAICS code with identical ownership and in the same geographic area as the acquiring entity. This is a perfect application for industry roll ups.

Partial Change of Ownership

Perhaps the most expedient change to the SOP is allowing partial changes of ownership. The new rule states that Partial changes of ownership are permitted without requiring the buyer to contribute an equity injection as long as the business balance sheets for the most recent completed fiscal year and current quarter reflect a debt-to-worth ratio of no greater than

9:1 prior to the change in ownership. If  the Lender is unable to document this fact the buyer will be require to inject 10% of the partial change of ownership purchase price, as reflected in

the purchase and sale agreement.

Franchise Directory

The Franchise Directory has been deleted.  However, lenders are still required to “Do what they do” applying the same reasonable and prudent practices and procedures that the Lender uses for its similarly-sized, non-SBA guaranteed commercial loans.

This means lenders will certainly require the Franchise Disclosure Document (FDD) and Franchise Agreement prior to funding franchise start-ups and acquisitions. 

Personal Resource Test

Prior to this update SBA lenders were required to determine whether an applicant’s personal liquidity and net worth disqualified them from SBA loan eligibility. The typical measurement was whether the applicant possessed 1 to 2 times the loan amount post equity injection.

Now, delegated SBA Lenders are not required to consider the applicant’s personal resources.

Life Insurance

The SOP has been revised to state for all 7(a) loans, Lenders must follow their internal policy for similarly-sized, non-SBA guaranteed commercial loans. Though lenders may still require life insurance, Lenders are able to close a loan without life insurance in place without worrying about placing their PLP status in jeopardy in cases where life insurance is difficult to obtain or may delay the closing.

In conclusion, these updates accomplish the following: 

• Clearly defines a Small loan and streamlines the application process
• Opens up partial change of ownership for the first time with no equity injection
• Facilitates full changes of ownership with little to no equity injection as the norm
• Opens up access to SBA funds for individuals with substantial personal liquidity and net worth
• Gives borrowers the ability to negotiate the need for life insurance and/or to make the case to close without it in place if necessary

This means that self-funded searchers, key employees and search funds should all put SBA lending on the menu when acquiring full or partial ownership in any M&A transaction up to $10MM. This includes third party acquisitions, key employee acquisitions, self funded searchers, search funds, mastermind groups etc.

With that said, I remain committed to publishing relevant information in a concise manner to help support the SMB community into the future on this podcast, on twitter @MySBAPro, YouTube @ Thinksba.tv and LinkedIn and Facebook @ ThinkSBA.

I am proud to be a professional and ethical SBA focused loan broker always doing what’s right for my clients.   These updates have both validated my original choice to represent the SBA as my primary funding source and have further emboldened me to continue to do so into the future.