The Small Business Administration (SBA) has implemented significant changes to its 7(a) loan program’s underwriting standards, aiming to enhance the program’s financial stability and reduce default risks. These adjustments mark a departure from the more lenient policies of previous years, introducing stricter requirements for borrowers.
1. Revised Definition of Small-Dollar Loans
The SBA has lowered the threshold for what constitutes a small-dollar loan from $500,000 back to $350,000. This change reflects concerns over increased liabilities associated with higher loan amounts and aims to mitigate risk within the loan portfolio. Inc.com+1Inc.com+1Inc.com
2. Reinstatement of Collateral Requirements
Previously, loans up to $500,000 did not require collateral beyond business assets. Now, borrowers must provide additional collateral, such as personal residences or other real estate, to secure loans. This measure is intended to provide lenders with recourse in the event of default. Inc.com+2Inc.com+2Inc.com+2
3. Mandatory 10% Equity Injection
Businesses less than two years old are now required to contribute a 10% equity injection when applying for a 7(a) loan. While previous policies allowed flexibility in meeting this requirement, the new standards mandate that the equity injection comes directly from the borrower, ensuring a greater personal investment in the business venture. Inc.com
4. Stricter Citizenship Verification
All beneficial owners of a business must now be U.S. citizens or permanent residents to qualify for a 7(a) loan. This is a shift from the previous requirement, which only mandated that 51% of ownership meet this criterion. The stricter verification process aims to ensure compliance with federal regulations.
Implications for Small Business Borrowers
These tightened standards mean that prospective borrowers must be more prepared when applying for SBA loans. Key considerations include:
- Increased Documentation: Be ready to provide comprehensive financial records and proof of collateral.
- Higher Personal Investment: Ensure you can meet the 10% equity injection requirement from personal funds.Inc.com
- Ownership Structure Review: Verify that all beneficial owners meet the citizenship or residency requirements.
For a detailed overview of the SBA’s updated underwriting standards, refer to the full article on Inc.com. Inc.com
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