The SBA recently released their changes to their SOP rulebook that will go into effect June 1, 2025. Below is a summary of impactful changes.
- Franchise Directory is returning. Franchises will be required to be listed in the directory. If a borrower operates under more than one franchise agreement, all franchises must be listed on the directory, not just the critical ones
- Need 100% ownership, including indirect ownership of the business, to include SSN, address, % owned, and DOB. All must be citizens or LPRs and primarily reside in the United States. There is a six-month lookback prior to the date of issuance of an SBA loan number. The only exception to allow a loan request to move forward would be if the ineligible person fully divests their ownership so as to sever any relationship, including being an employee of the business.
- Credit elsewhere test returns to examine the resources of 20% or more owners and the resources of the Applicant
- This will again require a spouse to sign the PFS
- Small loan size returns to $350,000 or less
- Loans more than $50,000 require hazard insurance on all assets pledged as collateral. If hazard insurance is not available, the loan can’t be approved
- Debt Service Coverage must demonstrate 1.15x coverage within 2 years from the loan funding or within 2 years from the end of construction
- Cash flow projections may not include anticipated cash flow from rental income from the project property, but it is ok to include the rental income in the global analysis
- Start-up businesses (generating revenue for 12 months or less) will require a 10% equity injection based on the total project costs
- Complete Change of Ownership will continue to require a 10% equity injection. Seller debt can only be considered as equity if it is on standby for the life of the loan and does not exceed half of the SBA-required equity injection amount. Note it may accrue interest and may be added to the standby debt to be amortized after the 7a loan is paid in full
- Factor agreements and merchant cash advances can’t be refinanced
- The six-month lookback period returns for individuals who decrease their ownership interest within 6 months of applying for an SBA loan. For anyone who was 20% or more and decreased to below 20% within 6 months of approval of an SBA loan, they would be subject to providing a guaranty and the collateralization requirements
- For a change of ownership that is purchasing a division of a business, the SBA will allow third party CPA prepared or reviewed financial statements in lieu of tax transcripts as a means to verify the revenues of the selling division of the business
- Environmental investigations are required on all commercial real estate properties pledged as collateral
- When refinancing existing debt, the SBA loan must be secured with at least the same collateral and lien priority as the debt that is being refinanced
- OFAC must be run on the business applicant and all owners. This will require Dl information on 100% ownership
- We cannot permit a C-PACE loan to be made on a property that has an SBA loan
- Investor equity is considered equity provided the equity investment not subject to an agreement to repay equity or make distributions to recover an investor’s investment prior to release of the guaranty. Note: Whether called “search funding” or by some other name, SBA will consider any investment subject to an agreement to repay equity or make distributions to recover an investor’s investment prior to release of the guaranty (e.g., certain types of redeemable preferred stock) to be debt and not equity
- The purchase of excess land (land that is not for immediate use as part of the project) is not eligible to be funded by SBA loan proceeds
Contact:
Nick Collins, Commercial Lender – Vice President
Bank Five Nine
155 W. Wisconsin Avenue, Oconomowoc, WI – 53066
P: (262) 560-2016
C: (262) 468-6169
F: (262) 804-9926
