Small Business Loan Process Could Ease

A Small Business Administration proposal to streamline two key loan programs is getting largely positive feedback from lenders.
Marielle SegarraMay 9, 2013

The Small Business Administration is hoping to make it easier for small businesses to secure loans. Earlier this year, the SBA proposed several changes to its loan programs designed to “expand program accessibility for more small businesses and streamline the paperwork burden,” says Jeanne Hulit, associate administrator for capital access at the SBA.

For one, the SBA proposed eliminating the “personal resource” test, which is used to determine how much collateral a company needs to provide to receive a 7(a) or 504 loan. (Companies use 7(a) loans to expand or finance working capital and 504 loans to purchase fixed assets such as equipment or real estate.)

Under the current rules, the SBA requires anyone with 20% or greater ownership in a business and personal resources in excess of SBA guidelines to take on more equity in a company, Hulit says. “By doing that, we [are sometimes] forcing changes in ownership structure because of somebody’s liquidity,” she says. “We feel we need to create more opportunities for investing in small businesses and not discourage that investment by saying somebody with personal net worth over a certain amount has to own more of the business than they intended because we have this arbitrary formula.”

4 Powerful Communication Strategies for Your Next Board Meeting

4 Powerful Communication Strategies for Your Next Board Meeting

This whitepaper outlines four powerful strategies to amplify board meeting conversations during a time of economic volatility. 

Second, the SBA would eliminate its nine-month rule, which allows a business to include only expenses it incurred over the prior nine months in its 504 loan application. The financial crisis demonstrated the folly of such a rule, Hulit says. Before the recession, some businesses bought property and renovated it, thinking they would be able to include those expenses in their total project costs. Then the markets collapsed, and credit wasn’t available, she says.

“A lot of projects got put on hold while businesses needed to adjust to a challenging economic environment,” Hulit says. “Penalizing them for not being able to include the investments they made in real estate or property for a project because the nine-month horizon expired was a disincentive to job creation and growth of the loan program.”

Among other changes, the proposal also revises the SBA rule on affiliation, expanding loan access to businesses that do not currently qualify because they are associated with larger companies. And it would make governance changes at Certified Development Companies (CDCs), non-profit organizations that back a certain percentage of each loan in the 504 program.

The comment period on the proposal ended on April 26. Now, the SBA will decide how to move forward with the rules. But it has received largely positive feedback.

“In the current banking regulatory environment, even for well-capitalized small companies, there is little access to loan funds for projects … which have the ability to add significant jobs and tax revenues to communities all over the United States,” wrote Marsha Dunbar, senior vice president at Holliday American Mortgage, a commercial mortgage bank in Oklahoma and Arkansas. The proposed changes have “the potential to add a tremendous amount of stimulus to many industries and communities both large and small across the country.”

Eliminating the personal resources test “would increase small businesses’ access to capital, which is a priority of the SBA program,” wrote Natalie Connell, marketing director at Thomas USAF Group, an investor in SBA loans. “A personal resource test needlessly restricts potential investors for small businesses and thereby limits job creation,” she wrote in a March comment letter.

A few members of the CDC community expressed concerns that the changes that directly affected them would be onerous and unmanageable. The SBA is currently reviewing comments, but has not set a date to release the final rule.

Read more about the SBA and small business financing on