The Small Business Administration this week reinstated stronger underwriting requirements for 7(a) loans through the issuance of a Standard Operating Procedure document.
The 7(a) program is a loan guarantee program designed to encourage lenders to provide loans to small businesses that might not otherwise have access to financing. Under the previous administration, SBA loosened underwriting requirements through a 2023 final rule to which the recent rise in default rates for 7(a) loans has been attributed.
The SOP also reinstated the franchise directory — a resource that assisted 7(a) lenders with determining the eligibility of a franchisee for a 7(a) loan before it was discontinued in 2023. In addition, the SOP restored a requirement that small business borrowers provide a 10% equity injection when the borrower is a startup or when the borrower is purchasing an existing business.
In testimony to Congress in February and in past comments to SBA, the American Bankers Association called for the agency to strengthen underwriting standards for 7(a) loans, reinstate the franchise directory, and reinstate the 10% equity injection requirement for startups and where the borrower is purchasing an existing business.
