We wanted to wish all of you a very happy holiday and tell you how thankful we are for your partnership. We also want to make sure we are communicating any changes coming to our industry in a timely manner.
There has been a lot of chatter and confusion around changes in SBA lending coming in 2018. We have met with some of our top lenders as well as reviewed the details outlined on the SBA website and wanted to distill down information that pertains to our business. The changes outlined below will go into effect on January 1, 2018.
- Franchise Registry: The franchise registry will be managed and updated by the SBA. In order for a franchise to be approved for an SBA loan, they must be on the approved SBA Franchise Directory. All franchises must submit their franchise agreement and FDD to the SBA directly to be approved. The full list, as well as instructions for being included on the directory, is available here.
- 10% Equity Injection: The SBA will require a borrower to contribute no less than 10% of the total project costs for a start-up or change of ownership (acquisition) loan (there was no minimum in place by the SBA previously). Individual banks usually require a 20 – 30% equity injection, but it remains to be seen whether these standards will be lowered. We are communicating closely with our partner lenders to better understand how this might affect lending.
- Seller Debt cannot be considered Equity Injection. A seller note may not be used toward the 10% equity injection required from the borrower. We can still use seller debt to reduce the SBA loan amount, but the repayments will need to be factored into the debt service coverage ratio calculation by the lender. This change is most likely to have immediate implications, so we will be paying close attention to how lenders structure deals that include a seller note.
- Removed the 25% Equity Injection Rule when Goodwill exceeds $500,000. Equity injection requirements for business acquisitions will now be made at a lender’s discretion as long as they still comply with rule #2 above. We don’t expect a large change from the 20-30% we have been seeing.
Please feel to reach out to me should you have further questions regarding these changes. By working together, we will ensure you get the funding you need.
Have a wonderful Thanksgiving.