Need a loan? Cash-strapped businesses can look here for a lifeline

The U.S. Small Business Administration (SBA) may be the best option for securing a loan these days. Prohibitive interest rates and tighter credit limits by banks are squeezing many small-to-mid-sized businesses in need of capital.

As of this past September 1, SBA changed requirements for both loan-seekers and lenders. The upshot is more businesses and entrepreneurs will be able to secure loans and the pool of lenders will expand.

Here’s a rundown of the major changes:

Government willing to take on more risks than the banks

• SBA is now the sole decision-maker on loan eligibility. Once a loan application via SBA’s electronic portal ETRAN is approved, SBA won’t deny or repair a guaranty purchase request by a lender.
• For a $500K-plus loan, a 10% equity injection is no longer required for startups. Caveat: The 10% equity “down payment” is still a must for companies changing ownership.
• SBA’s collateral requirement threshold is now $50K, up from $25K. Critics say this move, among others, will lead to bad loans and fraud.
• Previously loan applicants with low credit scores and seeking $350K-plus had to pass a 9-point underwriting process. Not anymore. Loans of $500K or higher may also be approved with: 1) a credit score of 155 or higher (300 is a perfect score) or 2) a cash flow analysis.
• Fintech lenders will now compete with banks to provide SBA loans. The administration ended a 40-year moratorium on accepting non-bank lenders in May. The number of non-bank lenders had been frozen at 14 since 1982.
• Partial change of ownership is now permitted under an existing loan.
• SBA will continue to cap fees that lenders can charge applicants. But from now on, lenders may charge a flat servicing fee, a packaging fee of $2,500, and technology service fees if applicable.
• Some things won’t change. For example, loan maximums will hold at about $5 million. Also: Individuals who own 20% or more of a business will still need to provide a personal guarantee (typically a home) as collateral.

For more info on SBA’s small business loan changes, click here.