SBA is cheerfully categorizing the changes in its recently-released SOP 50 7 3 as “improvements” – which they may well be, but Lenders still need to be aware of what those changes are!
In this article, we’re looking specifically at changes to equity injection requirements as they apply to new business loans granted to start-up businesses. SBA still requires equity injection for change-of-ownership loans; again, what we’re discussing here is specifically for start-ups.
The big change, in simple language: there is no longer any requirement from SBA for equity injection for a start-up business, regardless of the size of the loan.
That’s a big change, and it puts all the responsibility back on you, the Lender.
It’s clear from the way the new SOP is written that SBA is assuming that Lenders have effective, reasonable, and, as they put it, “prudent” policies and procedures in place for underwriting all loans, SBA or otherwise, including whether equity injections are required and what percentage of the loan they should be. Their language specifically states, “Lender’s requirement for equity and equity injection must be consistent with its requirements for similarly-sized, non-SBA guaranteed commercial loans.”
This is where having clearly documented policies and procedures, including checklists, for all your loan processing – non-SBA commercial and private-sector loans as well as SBA loans – is essential.
And yes, we know we jump up and down about documenting your policies, procedures, and checklists all the time, but let’s face it: SBA will want you to show your work in the credit memo – meaning, explain your thinking process and reasons for requiring – or not requiring – everything from certain types of documentation to, yes, equity injections.
Without that clarity, your loans may be at risk of rejection by SBA.
This is actually a great opportunity for Lenders to review and, as necessary, revise and consolidate their policies and procedures for underwriting all loans. In fact, SBA’s note that their changes are improvements is true; you no longer need to track different requirements for SBA loans versus non-SBA loans.
Finally, here’s a link to SBA’s side-by-side comparison of the previous SOP with the new one. The details about equity injection are about halfway down the page – and all the changes are outlined in simple, clear terms. https://www.sba.gov/article/2023/08/10/business-loan-program-improvements
Want some help sorting this out? As you know, we’re the policy-procedure-and-checklist experts, and we’re always available to assist SBA lenders with reviews and updates to their processes. Just give us a call at 877.576.0819, or contact us through our website. We look forward to talking with you!