What You Need To Know About Small Business Loans in 2020
Recently, the Small Business Administration (SBA) made a few changes to the approval process for SBA loans that are combined with Rollovers for Business Start-ups (ROBS) as the equity injection. All newly originated SBA loans that use Rollovers for Business Start-ups must be sent through the general SBA approval process to secure the guarantee of funds, including the submission of a full package to the SBA office for approval. This procedure is true for everyone, regardless if a lender has Preferred Lender Program (PLP) status. Our sources have confirmed that this change is effective immediately and will remain in place until the 2020 standard operating procedures are finalized.
What is ROBS?
ROBS stands for Rollovers for Business Start-ups. Many of us think of “rollovers” in connection with “rolling over” retirement accounts. In a ROBS transaction, funds from eligible retirement accounts, including 401(k) or traditional individual retirement accounts, are rolled over and invested into a business. That may mean investing in a new business or franchise, or buying or putting money into an existing business.
Here is how the transaction works:
– A C corporation — a corporate structure that allows shareholders — is formed
– A new 401(k) plan is created for that business
– The owner’s existing retirement accounts are rolled into the new 401(k) plan
– The rolled-over funds are used to purchase company stock in the C corporation
– The proceeds from the sale of stock provides the cash that is invested into the business
While not without risk (the owner is risking their retirement savings), ROBS provides an alternative way to finance a business without taking on debt, paying withdrawal penalties, or being taxed on the funds.
How will this change affect the SBA loan process?
Due to this change in procedure, any newly originated SBA loans that use a ROBS transaction for equity may take up to four to six weeks longer than normal to be approved.
Doug Whalen, Head of SBA Lending at Bryn Mawr Trust, was asked for his thoughts on the new change. He was quoted as saying: “This is a very significant move for the SBA to require ROBS transactions to be submitted to the SBA. Currently, there are only a limited amount of circumstances where Preferred SBA Lenders must submit a loan to the SBA for approval. The SBA must have a compelling reason or major concern regarding the ROBS process and how it impacts SBA loans. We are looking into the specifics of this new rule; however, the SBA historically has considered business acquisitions to be start-ups. Unfortunately, buyers using the ROBS process to meet the equity injection requirement for a business acquisition may find themselves to be a less attractive option when competing against other interested buyers who are not using the ROBS process. It will be interesting to see if the SBA makes a distinction for business acquisitions.”
Please note that the approval process for any newly originated SBA loan without ROBS has not changed.
If you are preparing to sell your first business or make your first major purchase, we can support you throughout the process. Symmetrical assists Middle Market companies strategically assess their needs and prepare for big transitions. Contact us for a confidential discussion about how we can help.