SBA Loan Rules Are Changing. Here's How That Could Be Good for Your Business

As a small business, it can be hard to access the credit you need. That's even more the case in the current risk-averse economic climate. So much so that a survey earlier this year showed that over three-quarters of small business owners worried about accessing credit. This is why it's great news that the Small Business Association (SBA) has introduced sweeping changes that could make it easier for business owners to borrow money.

How SBA loan rules are changing

One of the attractions of SBA loans is that they often have favorable terms, including lower rates, fees, and down payments. However, they can also involve considerable amounts of paperwork and have a long closing period. As a result, the SBA is overhauling its rules in what some insiders have called the biggest change in 40 years.

There are several different types of SBA loans, but the most common are the 504 and 7(a). The 7(a) loans are designed to provide working capital and can be used to refinance debt, buy furniture, or even real estate. The longer-term 504 loans are aimed at things like buying or constructing buildings, or purchasing machinery and equipment.

Here are three of the biggest ways the loans are changing.

1. Simplifying loan requirements

The SBA wants to cut the amount of red tape involved in loan applications. For starters, it won't take as many factors into account when deciding whether to approve a loan. It used to look at nine different criteria, including subjective items like the strength of the business and potential for success.

Now it will consider just three:

• Business credit report
• Business cash flow
• Collateral or equity

It is also changing the collateral requirements -- another factor that stops some business owners from accessing credit. For example, it has upped the amount people can borrow on a 7(a) without putting down collateral from $25,000 to $50,000. You'll still need to give a personal guarantee, but that's not the same as, say, having to put your home up as collateral.

2. Increase the number of SBA-approved lenders

The SBA does not issue loans itself, but it works with a number of lenders who do. For the past 40 years, there's been a cap on the number of Small Business Lending Company (SBLC) licenses issued. The license is what lets non-bank lenders issue government-backed loans, reducing the risk and making it easier for businesses to access capital.

Another big change is to increase the number of licenses, scrapping the limit of 14 completely. For now, it will license just three new SBLCs. According to a discussion document, the SBA estimates, "The three new SBLCs have the potential to increase 7(a) lending by approximately 425 loans per year over the next four years."

3. Address loan inequality

Many reports show that it's harder for minority-owned businesses to borrow money, including analysis from the Federal Reserve. Indeed, according to the 2022 Small Business Credit Survey, "Applicant firms owned by people of color were half as likely as white-owned applicant firms to report that they received all the traditional financing they sought."

The SBA believes its changes will make it easier for underserved communities to access credit. It will change the approval criteria for SBA loans and give more flexibility for loans under $150,000. It is also simplifying and clarifying the qualification requirements to make it easier for businesses to know if they qualify.

Another change is making the pilot Community Advantage Program permanent. The program aims to help both low-income borrowers and those in underserved communities get the capital they need. According to an SBA press release, "The Community Advantage Pilot Program has demonstrated success with higher rates of lending to Black, Hispanic, women, and veteran-owned businesses."

What it means for your small business

Businesses have various ways to access credit, including business credit cards, non-SBA loans, and business lines of credit. It's important to find the right small business loan for your situation. One thing that hasn't changed is that SBA loans are only available when you've exhausted other options, so you'll need to contact other lenders first.

All the same, if you've been considering taking out a business loan -- or have previously struggled to get credit, now may be a good time to familiarize yourself with the new SBA loan requirements. To be clear, you will still need to jump through a number of hoops, but the process may be a lot easier than it was. That said, easier does not mean easy, so give yourself plenty of time and ask for support if you need it.

Some experts have criticized the SBA loan changes because they think more people will default on their loans if the lending criteria are relaxed. Time will tell whether this is accurate, but what matters is making sure that your business is able to repay the debt. Think carefully about how much you need to borrow and how you will pay it back. Make cash flow forecasts for best and worst-case scenarios, and try to build in contingencies.

Importantly, understand what risk you are taking on and what will happen if you fall behind with your payments. It's one thing to take advantage of the streamlined lending process. It's quite another to find you've borrowed more than you can afford to repay. Defaulting on a loan can have serious consequences, no matter where the money came from.