It’s that time of the year when we start thinking about ways to improve ourselves and resolve to magically be better people as soon as the clock strikes midnight on December 31st. The SBA has made some positive resolutions as well. Like them or not, they have made some significant changes that go into effect January 1, 2018. Here are two of the biggest changes.
Cash Injection Requirements
o Cash injection of 10% of the full project cost will be required on all start-up businesses and business acquisitions. A seller note, on full standby for the term of the loan, can count towards 50% of the injection requirement for business acquisitions. Meaning that a buyer needs to inject at least 5% into the acquisition of a business.
o In the case of a partner buyout, the pro-forma equity position after the change of ownership must be at least 10 percent of the total assets. Otherwise, the remaining owner(s) must provide an additional equity injection that will result in no less than a 10 percent net worth of total assets.
Eligible Loan Term
o The new SOP reads “When loan proceeds are used for multiple purposes (land & building, working capital, and machinery & equipment, or the refinancing of any these purposes), the maturity may be a blended maturity or, if 51% of the use of proceeds is for real estate, the maximum maturity may be up to 25 years.” This is a change from the current rule which allows a lender to use a term of 25 years if real estate was the asset class comprising the largest percentage of the use of proceeds, not necessarily above 50%. Splitting loans into two may be an option here per SBA policy writers, but this has been discouraged historically by the NLPC due to language in the Boilerplate. I would encourage lenders who are attempting to split loans to show the advantage to the borrower for the split and not just the advantage to the lender. Keep in mind that in the current secondary market environment a blended term loan below the 20 year mark would result in a 3% to 4% difference in premium.
More on the changes for 2018 later!