Unlocking Unlimited Funding: The New SBA 7(a) Loan Changes You Need to Know!

The Game-Changing SBA 7(a) Loan Update

The Small Business Administration (SBA) has just made a monumental change by removing the $5 million cap on its popular 7(a) loan guarantee program. This shift opens up vast opportunities for entrepreneurs eager to create a diversified portfolio of small businesses, akin to their own mini Berkshire Hathaways.

What is the SBA 7(a) Program?

Established in 1953, the 7(a) program provides a 75% guarantee on loans, significantly reducing lender risk and facilitating funding for small businesses. The loans can be utilized for various purposes including working capital, equipment, real estate, or even acquiring a business. Business owners appreciate the program for its forgiving collateral requirements, often needing just a personal guarantee and little to no down payment. With repayment terms extending up to 25 years, it’s a far more affordable option compared to standard bank loans, which typically max out at 10 years. In fiscal 2024, the SBA approved 70,242 loans totaling $31.1 billion, with an average loan size of $443,097.

The New Rule Change

In May 2023, the SBA modified the old affiliation rule that limited borrowers to $5 million in total loan guarantees. Now, entrepreneurs can access up to $5 million per business, provided each business operates within a different subsector of the North American Industry Classification System (NAICS), which consists of 96 subsectors. This change allows successful business owners to expand their operations and diversify their ventures.

Why the Change?

According to an SBA official, this adjustment aligns the agency’s lending criteria with the Small Business Act's definition of a small business. Previously, the SBA grouped businesses with common ownership together, which limited access to funding. Now, businesses can be treated independently, allowing for greater financing opportunities.

Implications and Reactions

While some industry experts are optimistic about the changes, noting a growing trend of buyers interested in acquiring multiple businesses, others, like Eric Pacifici from SMB Law Group, express concerns about the potential pitfalls of forced diversification. He emphasizes that managing multiple businesses can be complex and may not always be the best strategy.

Nevertheless, to qualify for loans exceeding $5 million, borrowers must demonstrate excellent credit and a solid track record of success. The SBA still retains 25% of the risk on these loans, ensuring that not everyone will qualify for large amounts of funding.

Conclusion

The SBA's new rule significantly enhances the funding landscape for small business owners, reflecting a shift in how diverse ownership is viewed. This change is expected to empower aspiring entrepreneurs to take advantage of greater financial resources, driving business growth across various sectors.