Previous SBA 7(a) Loan Rules:

The SBA 7(a) loan program, under the old rules, required a significant equity injection from the buyer, typically between 20-25%. This meant that the buyers had to provide a large down payment from their personal funds to secure the loan, making it less accessible for potential borrowers with limited personal assets.

New SBA 7(a) Loan Rules:

Under the new rules, the equity requirement has been significantly reduced to 10%. This means that banks can now finance up to 90% of the purchase price. Additionally, the source of the equity has been diversified. Out of the 10% equity injection, only 5% needs to come directly from the buyer, while the remaining 5% can be derived from a seller note.

The ability to use a seller note to cover a portion of the equity requirement is a significant new development. 

A seller note is a type of vendor finance where the seller essentially extends a loan to the buyer to cover a portion of the purchase price. This note can now be used to cover half of the required equity (5 out of 10%).

Under the existing regulations, it is not permissible to utilize SBA 7(a) loan funds for procuring a fraction of a business or another owner's stake. However, the new May 2023 rule will alter this provision and enable borrowers to purchase a portion of a business or another owner's interest in a business. 

This modification has the potential to facilitate employees' ownership, aid co-owners in acquiring their partners' shares, and open up opportunities for equity rollovers using an SBA 7(a) loan.  We see a ton of possibilities here, including a realistic path for key employees to buy the business. 

Compared to the previous rules, the new SBA 7(a) policy is more favorable for several reasons.  We have already seen an uptick in M&A convos since these rules have gone into place.

Lower Equity Requirement: Reducing the equity requirement from 20-25% to 10% makes the loan more accessible to potential buyers who may not have large personal funds available.

Increased Bank Financing: With banks able to cover up to 90% of the purchase price, the financial burden on the borrower is significantly lessened.  This will also allow for more creative deal structures including a combination of SBA financing, LP investors and rollover equity. 

Inclusion of Seller Note: Allowing a seller note to cover part of the equity requirement can further reduce the personal cash required from the buyer. It also allows for more flexibility in structuring the deal between the buyer and seller.

Increased Buying Power: Overall, the new changes could potentially allow buyers to purchase larger businesses or reduce their personal financial risk when buying a business.  The benefits of business ownership from a tax and financial perspective are huge and this might just be the rule change that gets you over the hump!