The Small Business Administration has tightened its rules for government-backed loans, with significant changes affecting business acquisitions beginning Oct. 1, Inc. reports.
The new rules codify citizenship requirements limiting SBA-backed financing to U.S. citizens and nationals, while first-time buyers now must provide a 10% equity injection, with at least half coming from their own funds.
Most transactions also face a higher debt-service coverage requirement of 1.25, up from 1.15, while business expansion transactions retain the 1.15 threshold. The SBA has created four categories for acquisition loans, initial acquisition, business expansion, owner buyout and cooperative transactions, with different requirements for each.
Deals involving a change of ownership valued at $3 million or more will require an independent quality-of-earnings report, adding potentially thousands of dollars in costs and as much as six weeks to the closing process. Smaller acquisition loans of $350,000 or less will also lose access to expedited approval and instead undergo the standard 7(a) review, potentially extending timelines from weeks to months.
Lenders warn the changes could make financing more difficult and slow small business dealmaking, particularly for first-time buyers and larger acquisitions. However, manufacturers will see reduced fees and expanded eligibility as the administration seeks to encourage domestic manufacturing.
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