New SBA Loan Rules for Small Business Expansion

Until recently, business owners looking to expand using Small Business Administration (SBA) loans faced significant hurdles. Tight lending restrictions, prohibitive down payment requirements, and complex paperwork made it a challenge to open a new location, acquire a similar business, or purchase real estate or new equipment.

However, some of those challenges are easier to overcome, thanks to new SBA rules that allow small business owners to cash in on their sweat equity, which is the value-enhancing benefit of hard work. Now, owners who qualify are no longer required to make the usual 10% down payment in cash for SBA loans.

"The SBA introduced new rules in late 2023 aimed at expanding access to capital for small businesses. Instead of an equity infusion, entrepreneurs can now invest the equity they’ve already put into their businesses into an expansion," says Nicole McCourt, Senior Vice President and SBA National Director at Fifth Third Bank. "Think of it like sweat equity instead of a cash infusion."

In addition, small business owners can use a note from the seller to help meet the 10% equity requirement when acquiring another firm. Typically, when a seller note is part of the equity injection, the lender will place the note on full standby and subordination, meaning the seller cannot receive payments until the SBA loan is paid in full or the lender approves payments, usually after two years. The arrangement helps ensure the new business will thrive in its early days.

Challenges for Small Business Borrowing

Small business owners know too well how difficult financing an expansion can be.

Working hard just to break even or make a small profit, most entrepreneurs likely don’t have a lot of cash sitting around to invest in expanding. "They put their blood, sweat, and tears into their businesses and use their operating funds to keep their businesses afloat," says McCourt. "In most cases, every penny goes back into operations."

Take an independent coffee shop owner or a veterinarian who wants to open a new location on the other side of town. The perfect opportunity may have just become available, but the person may not have the liquidity to purchase the new location. Business owners want to seize these opportunities but may not have the cash on hand. "This is where the new rules can really help," says McCourt.

The New Rules Explained

Issued in May 2023, the new SBA rules may help small business owners looking to expand in some very vital ways. Chief among them is the ability for many entrepreneurs wanting to grow their business to qualify for 0% cash down SBA loans instead of putting 10% down as previously required. This also applies to real estate lending, which with recent high interest rates has been particularly inaccessible for small business owners.

Previously, to finance an expansion with SBA loans, business owners would be required to come up with 10% equity based on the total project or real estate deal and then go through the process of proving they have the required cash on hand. A lender would typically ask for two to three months of bank statements to verify the money was in an operating account and review unusual deposits to confirm the source. If any portion was gifted or borrowed, additional documentation would be required.

Expanding Through Acquisition

Acquisitions are another key area that stands to gain from the new rules. Purchasing a similar business can be one of the best ways to gain market share, expand product lines, improve pricing, and strengthen vendor relationships.

Previously (and still in some cases) when owners acquired another business, they could split the equity infusion between the buyer and seller. But the hurdles to verify those deals were hard to get through, says McCourt.

Under the new rules, the SBA now considers certain business acquisitions in the same light as expansions, meaning the minimum equity injection of 10% is no longer required. To qualify for no-cash acquisition or expansion loans, both the buyer and seller must be in the same geographic area and be in the same business. More specifically, they must both have the same six-digit North American Industry Classification System code used on federal tax returns. And, like all loans, SBA lenders look for strong businesses with enough projected operating revenue and financial stability to thrive.

A New Generation of Business Owners

Easier acquisitions could help relieve what McCourt says is a lot of pent-up demand she’s seeing from a new generation of business owners. As some business owners are looking to retire, more millennial and Gen Z entrepreneurs are eyeing businesses and practices they’d like to be part of.

In recent years, a number of economic factors, including high interest rates and high inflation, have prohibited the new generation from acting on their aspirations. With the new SBA rules, inflation continuing to decline, and the Federal Reserve having started to lower interest rates, "it could be a very exciting time for new entrepreneurs," says McCourt. All of this makes it easier to pass on businesses to family members as well, building generational wealth for another new crop of small business owners, she adds.

Refinance and Debt Consolidation

It’s important for small business owners to remember that some SBA loans can be used for debt consolidation and refinance. Entrepreneurs who have used conventional loans, seller notes, or supplier financing may find an SBA loan can help them consolidate debt and manage their monthly payments in a way that opens more capital for business operations and expansion opportunities.

Fifth Third Is Here to Help

As a trusted advisor to entrepreneurs, Fifth Third can provide the guidance small business owners need to understand the new SBA rules, the types of SBA loans that are right for their expansion needs, and how best to navigate the paperwork involved. When SBA loans aren’t enough or simply aren’t the right fit, Fifth Third can provide guidance on how private lending can help fill the gap.

Understanding the new SBA loan rules can help any small business owner looking to grow their business. Now may be a perfect time to determine if expansion or acquisition is right for your business.

Make an appointment with a Fifth Third Business Banking representative in your area who can help you take advantage of the next opportunity for growth or visit a banking center near you.