A breakdown of the new SBA loan rules (Part 1)

If you’ve been keeping up with the business acquisitions space, you might have heard…

As of June 1, the SBA has put new rules into place affecting SBA 7(a) loans.

Long story short:

The Trump administration is tightening up the SBA’s lending standards in order to make these loans safer for the government.

I’ve seen a ton of confusion and panic about these changes online.

So I want to set the record straight by giving you a rundown of:

• Which rules have (and haven’t) changed

• How this affects the financing strategies I’ve been talking about in this newsletter

• Deal structures and strategies that still work

• Why these changes might end up being a good thing in the long term

The next few emails will be a short series covering all of the above.

Let’s get right into it.

What has changed?

Seller debt equity changes

For context, SBA loans require a 10% down payment.

Before the new rules went into effect, you could pay $0 out of pocket if you used seller financing correctly.

You could use a 10% seller note on full standby to count towards your equity injection.

(Seller note = the seller “loans” a portion of the purchase price up front to the buyer, to be paid back over time.)

(Full standby = the buyer doesn’t have to pay back the seller for a period of time, usually two years or more.)

By structuring a deal this way, you’d pay $0 out of pocket and wouldn’t have to make payments to the seller until the standby period was over.

But now with the new rules:

• A seller note can only be used to cover half of the down payment (5% of the purchase price instead of 10%)

• And you must bring the remaining 5% yourself, either from you or an investor

Seller note changes

It gets even trickier here.

In order for a seller note to count towards that 5% equity injection for the down payment, the seller note now must be on full standby for the full term of the SBA loan.

Why is this a big deal?

Because the standard SBA 7(a) loan term is ten years.

Most sellers won’t be thrilled about waiting ten years instead of two to start getting paid back on their seller note.

So this means fewer sellers will be willing to offer seller financing to help cover the SBA loan down payment.

To be continued in Part 2…

There’s one more huge change I haven’t mentioned.

But this email is already running long, so we’ll save it for Part 2 on Thursday.

Until then, here’s a little something you’ll find useful:

I occasionally (but infrequently) come across high-quality businesses for sale that I think my subscribers would be interested in.

And when I do, I send an email broadcast with the details in case anyone wants to jump on it.

To opt in to those emails, just fill out this 2-minute survey:

👉 I want to buy (or invest as a silent partner into) a small business

Or, if you have a business you want to sell, tell me the details below. We’ll reach out if we find a good fit.

👉 I want to sell my small business (and I’m actively looking for buyers)

Onward,

— Ben Kelly