Adapting to The SBA’s Recent Loan Changes: What Lenders Should Know

In September 2024, the U.S. Small Business Administration (SBA) announced changes to the 504 Loan Program, simplifying the refinance process for small business owners. These changes go into effect November 15 and will assist small business owners reduce their debt payments and access more affordable financing for growth, benefiting businesses by providing long-term, fixed-rate loans for physical property like real estate and equipment.

The announcement of new rules for the 504 Loan Program follows the Federal Reserve’s rate cut which is already lowering borrowing costs. This reduction benefits nearly 200,000 borrowers using the SBA’s 7(a) Loan Program, resulting in a 0.5% drop in their monthly payments and an estimated $360 million of annual savings.

The refinancing rule change coupled with lowered interest rates will significantly impact small business lenders and financers, forcing them to address these changes in a way that benefits their customers and preserves their competitiveness in a changing market.

Implications of SBA rule changes on SMB lenders

The 504 Loan Program changes will streamline the refinancing process for small businesses borrowers and lenders alike. This simplification of the loan program’s rules is intended to provide greater flexibility and expanded access to affordable capital.

It will be easier for small business owners to refinance property, particularly land, facilities and equipment. Also, small businesses can broaden the ways they use their debt refinance loan funds which is beneficial for businesses seeking to grow their operations.
For example, a successful neighborhood restaurant will gain increased flexibility in how they use their loan, enabling them to refinance their current equipment, enhance their kitchen facilities and even open a new location. Reductions in the restaurant’s monthly loan payments open more opportunities for businesses looking to reinvest their savings into expanding their operations.

Another key change removes the requirement for borrowers to show a minimum reduction in their loan payments to refinance. Revisiting the neighborhood restaurant example, with the minimum reduction requirement lifted, the restaurant owners now have the freedom and flexibility to decide if refinancing their kitchen equipment benefits their business. The owners can choose to reduce costs and lower monthly payment or tap additional capital from their fixed assets without their monthly expenses increasing.

Tackling increased refinancing through automated loan process

Expanded refinancing options will likely result in a higher demand for borrowers seeking to refinance their current loans. This presents a unique opportunity for lenders that can strategically manage a potential influx in refinancing while managing risk.

To tackle this challenge lenders can integrate third-party solutions into their systems to help create a frictionless decisioning process by automating business loan underwriting and origination. Leveraging scalable, modular solutions platforms that connect lenders with real-time accounting, tax, KYC and KYB data can enhance underwriting efficiency and reduce credit losses by identifying risk early.

Moreover, end-to-end digital lending capabilities enable faster underwriting by automating credit risk assessments and decision-making. This is particularly beneficial for lenders as an influx of borrowers seeking refinancing options could overwhelm traditional loan processing.
Having a streamlined underwriting process will be crucial for lenders processing refinancing applications under the new SBA rules. This enables lenders to evaluate an applicant’s eligibility and make loan decisions quickly.

Enhancing risk management and data integration for assessing refinancing

When assessing refinancing applications, lenders must evaluate current debt obligations and payments histories. Integrating enterprise historical data with third-party data and network data sources provides a comprehensive and real-time view of an applicant. This will be crucial as lenders begin assessing refinancing applications.

Lenders can improve risk management by leveraging solutions that seamlessly integrate with existing systems, allowing them to validate, enrich and compare borrower applications against a broad range of historical data. This approach provides more efficient and informed lending decisions.

With more borrowers likely to pursue refinancing, the risk of fraudulent applications may also increase. Using reliable tools that identify fraudulent applications through data linkages will not only help mitigate fraudulent activities but also enhance the overall borrower experience.

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