The Small Business Administration’s (SBA) Final Rule on Affiliation and Lending Criteria for the SBA Business Loan Programs (88 FR 21074, effective May 11, 2023) included some impacts to the Collateral procedures that lenders use in their 7(a) lending programs. Understanding these changes is crucial both for the lenders and the small businesses seeking financing. We will summarize some of the key points here. However, it is important to start by pointing out the basic approaches to collateral that SBA has not changed. SBA has maintained that an SBA loan should not be declined based solely on the lack of adequate collateral; a Lender is still required to use the same practices as their non-SBA portfolios to identify collateral that conforms to their own internal procedures; and the SBA guaranty is not a substitute for available collateral.
- Loan sizes where collateral is not required: Previously, loans of $25,000 or less were not required to take collateral. The final increased this threshold to $50,000 in an effort to streamline the lending process and reduce the administrative burned for lenders.
- Loan sizes where collateral practices must conform: for loans over $50,000 and up to $500,000 Lenders must use practices to identify collateral that align with procedures for their similarly-sized, non-SBA guaranteed commercial loans.
- Previously the SOP included several “at a minimum” requirements in addition to the conforming language that included, first lien on assets financed, lien on all fixed assets up to the point of being fully-secured, and the ability to take trading assets.
- The “at a minimum” language has been removed entirely and the collateral guidance has been combined for SBA Express and Small 7(a) so that the requirement to conform to internal policies is consistent for all loans under $500,000.
- Collateral shortfall – the requirement to reach “fully-secured” is now only included in the guidance for loans greater than $500,000.
The SBA's new procedural notice for collateral requirements in Small 7(a) Loans introduces important changes that lenders and small business owners should be aware of. These changes aim to provide clarity and standardize practices so that lenders can operate in the small business space with better efficiency and consistency. By understanding these modifications, lenders can make informed decisions, while borrowers can navigate the loan application process more effectively.
If you want to delve deeper into these changes or if you have any questions, we encourage you to reach out to us. Simply visit our SBA LSP Services page at https://www.lenderscooperative.com/sba-lsp-services/ and use the contact form at the bottom. We are here to provide further insights and assist you in navigating the evolving landscape of SBA Small 7(a) Lending.
Stay informed, embrace these changes, and let us support your journey towards success in accessing SBA loans for small businesses in your community.