1 - The Inside Scoop on the SBA's Latest SOPs

Welcome to the inaugural episode of CVBBA Insights: Thrive in ‘25 – I’m your host, Heather Valeri, Board Member of the Carolinas-Virginia Business Brokers Association. It’s an honor to bring you timely insights and expert conversations to help you thrive—no matter where you are on your business journey.

Today, we’re kicking things off with a topic that impacts buyers, sellers, brokers, and lenders alike: the latest updates to the SBA’s Standard Operating Procedures. These changes can open new doors—but only if you know how to navigate them.

I’m joined by two outstanding guests:

• Joe Diggs, Vice President & Business Development Officer, SBA Lending Division 

• Jim Frey, SVP - Business Development Officer at Gulf Coast Small Business Lending.

Together, we’ll unpack what these SOP changes mean for small business owners, brokers, and lending partners—and how you can stay ahead in this evolving landscape.

Let’s dive in!

 

 

Have more questions? Get into contact with today's guest:

Jim Frey, SVP - Business Development Officer

Gulf Coast Small Business Lending 

[phone]

[e-mail]

 

Joe Diggs, Vice President 

Business Development Officer, SBA Lending Division

Fidelity Bank

Charlotte, NC (Remote Office)

Direct: 919-753-1084

[e-mail]

 

 

 

Episode Transcript

(00:00):
Welcome to this episode of CVBBA Insights, Thriving 25. I'm Heather Valeri, an award-winning

(00:16):
business broker and a proud member of the Board of Directors for the Carolina Virginia
Business Broker Association, the CVBBA. I'm also the founder and CEO of Meridian Business
Advisors, a business brokerage firm headquartered in Charleston, South Carolina. I'm excited to
host this podcast dedicated to business brokers and dealmakers, exploring crucial insights that

(00:41):
will help you navigate the business brokerage landscape. Today, we have the privilege of
speaking with two esteemed experts in the field of business finance, Jim Frey, Senior Vice President
and Business Development Officer at Gulf Coast Small Business Lending, and Joseph Diggs,
the Vice President and Business Development Officer of the SBA Lending Division at Fidelity

(01:04):
National Bank based in Charlotte, North Carolina. In our discussion today, we'll be examining the
recent updates to the Small Business Administration's Standard Operating Procedures, SOPs,
concerning business loans. This topic is vital for business brokers, business owners, and deal
partners, as these changes can affect the financing options available to business broker clients in

(01:31):
the overall business landscape. Before we dive into the specifics of the new SBA SOPs, I'd like
to invite Jim and Joseph to briefly share their backgrounds in SBA lending and banking.
Hey, thanks. I appreciate it. Yeah, I actually got started in small business way back, you know,
long story short, when I was in college, my dad had a family business, you know, I was worried

(01:56):
about my CD collection that time. And he had a heart attack. And luckily, he recovered. But it
was a great experience for me because I had to jump into the business and run it until his health
recovered. And then I worked with him for a number of years. And then I actually took it over when
he retired. So I ran that for about 10 years. And then I actually told it the business on a seller
note, didn't get paid different things that didn't work out. So that was an education. Then I was

(02:21):
hired by a friend of a friend into the SBA world. And I found it exciting because every day was a
new adventure with financing a dentist one day, a franchise the next, it was all across the board
and all across the country. So I really enjoyed that. Here I am after 2004 was when I started in
the SBA world, different with multiple banks, I like where I am now, we're a little bit smaller,

(02:43):
less bureaucracy. But it's really exciting to have helping people start up a business,
acquire an existing one, expand, whatever. So I love it.
Joe, tell us about yourself.
Sure. Thank you, Heather. My name is Joe Diggs. I am currently a National Business
Development Officer with Fidelity Bank, headquartered in Fuqua Verena here in North

(03:05):
Carolina. I have a guess my career expands over 35 plus years, culmination of investment banking,
commercial real estate finance, credit risk background, capital markets. I did have a very
short stint as a federal regulator. And I got involved with government guaranteed lending,
specifically the SBA products in 2015. My career has really encompassed several leadership roles

(03:30):
at multi-billion dollar publicly traded companies. I have specialized in mergers and acquisitions.
I have done a stint in CNBS, securitizations and conduit lending. And I'm also versed in
construction and real estate development. Most recently, my charge in the Carolinas have led
several regional banks as the head of US SBA administration lending. My primary responsibilities

(03:54):
historically has led all strategy development implementation of business development and loan
production, front end processes, back end processes. Passion wise, I am the founder and executive
director of a mental health awareness organization called Roll with the Punches. I'm also a US Army
Special Operations Forces vet. I have owned and operated a franchise nine round, which is a kick

(04:18):
boxing fitness franchise. And I'm the former two time light heavyweight boxing champion are some
things relevant to my to my passion. So that's Joe Diggs ever. Jim, thanks for joining today.
That's all. Yeah, that's it. That's it. That's it. You're not your typical banker. Definitely not
your typical banker. Let's delve into our topic today. Jim, can you briefly explain the significance

(04:47):
of the new SOP 5010-8 that will take effect on June 1st? Yeah, I think a couple things that from
a high point of view, it's restoring a lot of the criteria from past SOPs and adding a few new
things, trying to be a little more transparent, trying to help the borrowers protect borrowers,
improve the performance of the SBA portfolios, things like equity injection, the ownership changes,

(05:13):
seller notes are changing, and guarantee requirements. Certainly, there's some changes
around citizenship. But I think some of them can be significant. There are some where I think some
banks like mine, we kind of held to some of the higher criteria from previous SOPs. So it's not a
big change on some of these items, restoring or returning to what they did before, because we

(05:37):
already kind of stayed there. There's probably a few lenders that they might have to reshuffle
things, but they're trying to improve the overall standards and process. I think it's in general,
to be a good process. Joe, what do you think were some of the primary motivations behind the SBA's
changes to the 7A and 504 loan programs? Sure. So let me put a parentheses around, I will not

(06:04):
dare speak on behalf of the SBA and why the changes were kind of instituted. But I can tell
you a couple of things that I think are a little more than anecdotal in terms of facts. I think for
the first time in the program history, the SBA itself as an administration has operated without
zero subsidy. And what that means, Heather, is a couple of years ago, it was decided for loans

(06:27):
less than $1 million that the SBA would require its guarantee fee. And if you think about the
program as an insurance policy for lenders to make various types of loans, they basically waived the
insurance premium. So the program went along one, two, three years without generating that source
of revenue. They do not receive appropriations from Congress. And I believe for one, from an

(06:52):
operating perspective, they found themselves in a position that, hey, we're not generating the
appropriate revenue without having to knock on the doors of Capitol Hill. So I think that's A. B,
the SBA administrator joined over two, three thousand participants on a call a few weeks back,
and she began to talk about wire transfer fraud, the increase in fraud in the program,

(07:13):
particularly on the dispersing of funds at closey. And then the SBA themselves rolled out what they
determined was a small lending limit of $500,000. And ultimately that, you know, lessened the
requirement for collateral. It's softened some of the underwriting criteria. And I believe at this
juncture, the SBA is starting to experience an increase in defaults. And a lot of that is happening

(07:38):
under the small dollar program as opposed to the larger dollar program. You put all three of those
together, as Jim sort of alluded to, I kind of call it the Walmart rollback. We're just rolling it
back to maybe 2018, 2019. Putting things back in the perspective of where they were pre-pandemic
will be my response on that. How did the new loan eligibility criteria affect potential borrowers

(08:00):
compared to previous standards? So my response to that, I'll point straight to the administration,
to two things. Administration meaning the current administration, its economic climate, and et cetera.
For example, for one, simple things like the date of birth on all owners. That means,
prospectively, you know, if I'm a potential applicant, I'm forming a company, I have the

(08:25):
knowledge, skills, and expertise, but I don't quite have the pockets to fund this particular
venture. I may take on a partner. Today, that partner, whether it's 10%, 5%, 20%, direct or
indirect, must prove citizenship. So I think administratively, the immigration policy says
whether it's direct or indirect ownership, one can be deemed as an ineligible person to borrow. So at

(08:50):
this juncture, if you're not a US citizen, if you're not naturalized, if you're not a legal
permanent resident, i.e. a green card, there's a six-month look back that applies and may render
someone ineligible to borrow under the program. Those are direct new impacts that potential
borrowers compared to the previous standards, they may face that challenge today.
And you think that was put in place just to help prevent default, loan default?

(09:14):
I think it's a culmination of everything. I don't think there's a direct correlation between
defaults and eligibility criteria for borrowers. That's just one new nuance that could render
not the transaction, not the business. It just simply may impact the borrower or the composition
of the borrowing entity eligible to borrow under the program.

(09:37):
Jim, could you elaborate on that?
I'm sorry about that, Ed. I just wanted to check my counterpart here. Those are the top of my things,
but I wanted to know whether there are any other things I may be leaving out just
directly back to a borrower.
I think that's good. That covers most of it. It might make it a little tougher in some cases,

(09:58):
but it protects the borrower, I think. It protects the performance level, yeah.
Jim, could you elaborate on the reinstatement of the SBA franchise directory and its importance
for franchisers?
Yeah, like in general, like Joe and I mentioned, we're kind of restoring or returning to some of
the things that happened before, the previous SOP. The franchise directory is just a centralized

(10:23):
resource, so to speak. A list of franchises that the SBA works with talks about eligibility.
Is this franchise eligible or not? It usually kind of protects the borrowers,
things about control and different things like that. It's bringing that back,
and it's also improving it, I think, because before, if something wasn't eligible or there's

(10:44):
some question about it, we'd have to chase down an addendum. That was kind of a case-by-case
situation. We'd have to get this addendum signed or negotiated, and sometimes that took time.
They're kind of eliminating that. Franchisers have, I think it's until July, to submit and
get the criteria to the SBA and get on the franchise directory, so we won't need that

(11:07):
addendum like we did before. That should streamline the paperwork and the process,
at least in that regard. Basically, there's going to be a list that simplifies the list.
Is it eligible or is it not? Is it on the directory or not? It's going to help the
process, I think. What impact do the stricter underlining criteria have on startups applying
for 7A loans? That's a little bit more rigid. The SBA increased the SBSS score, the small business

(11:35):
score, about 10 points. Of course, the injection level on paper, they say it has a 10% minimum
injection, but again, a lot of banks kind of stayed high, so to speak, or stayed at that level
or hires, because a lot of banks may ask for more than that, 20%, 25% even on some startups
for different reasons. The stricter ownership around citizenship and things like that, so

(12:00):
100% has to be owned by U.S. citizens or nationals or LPRs, lawful permanent residents,
so that is stricter, and there will be perhaps less applicants due to that. Other things like
the move towards more stock purchases and the reinstate of hazard and life insurances for some
lenders, again, we kind of stayed at that lender and a lot of did, but some lenders may have to

(12:23):
revert back to that. In general, it's a little bit more strict, a little bit more than the previous
instance. So, can you discuss the significance of the mandatory 10% cash injection requirement
for startup loans? Sure, this one is a little more of a whammy because we're all caught a little
flat-footed. This is not a rollback, this is more of restoring the requirement for 10% equity

(12:46):
injection for any loan, for any size, whether it's a startup business or a change of ownership,
and that's a little spin on things because it does directly impact a couple of things.
So, for example, equity injection, when you start to begin to talk about sources,
it's either personal cash, borrowings, you can kind of mortgage your personal residence,

(13:09):
gift letters and so forth and so on. Those were more traditional and standard, but to the extent
that the 10% of that equity injection is in the form of a seller note, so seller financing,
if 5% or 50% of that 10% equity injection comes in the form of a seller's note,
then it needs to be on full standby for the life of the loan. Full standby meaning no expectation

(13:34):
of repayment and ultimately, so as long as there's an SBA loan out there with the borrower,
that seller cannot receive payment under that financing instrument. That's a major change.
It sort of holds the seller. If you sort of believe that a large percent of businesses are
owned by baby boomers, hey, I've grown this company for several years, I'm facing retirement,

(13:56):
I'm selling this organization, I'm not walking away with maximum net loan proceeds,
it kind of keeps the seller as a part of a deal, leaving money on the table, so that's sort of
significant. For startup business, I'll use the proverbial skin in the game. Skin in the game
simply just says high leverage lending, 100% financing or 90% financing. The SBA is requiring

(14:18):
lenders to force startup businesses to also have 10% of equity in a transaction. The small
loan threshold again is returning back to $350,000, so there was some lightening or
softening of some requirements there, but as it relates to restoring the 10% equity injection,
it now applies for any size loan, whether you're a startup or a change of ownership.

(14:42):
I believe we're going to talk a little bit later about multi-step partial ownership and
different types of asset purchases versus stock purchase, but right out of the gate,
that's something that affects both the lender and the borrower with respects to restoring
that 10% equity injection and how seller note treatments are now being viewed under the current
SOP. Do you think that is going to impact or decrease the number of SBA loan requests that

(15:08):
come across your desk because of that requirement? I still believe there's velocity in deal flow and
volume in the marketplace. It's simply impacting, hey, what is considered equity?
What are requirements for sellers? It may or may not impact valuations, maximum value,

(15:30):
to the point of where lender feels comfortable financing the transaction,
where seller is comfortable with its net and or maximum proceeds, and frankly, in your space,
Heather, it may change what you do and or approach businesses in terms of its valuation,
listings, and things of that nature. I think it's a trifecta. It's going to impact lenders,

(15:51):
it's going to impact borrowers, and it's going to impact business advisors and intermediaries
with how we approach SBA lending. I don't view it as negative or positive. It's just, hey,
how do we operate in this environment? In some respects, it may definitely turn to what one may
deem as prudent lending or best practice. If I could interject, I agree with all that. It

(16:13):
probably just might change maybe the type of deal. Sometimes during a recession, maybe you see more
startups than others. It's just kind of the market changes a little bit, what's maybe more of the
focus. I don't think there'll be less necessarily. Maybe different deals might come across their
desk than another, perhaps. You just have to evolve and change with the market, like always.

(16:35):
What are the implications of the new personal resources test for loan applicants? How does this
change the evaluation process? I think that's for me, I believe. Yes. I would distinguish,
right? I'll use a different terminology, Heather. Us lenders kind of talk about it as the credit

(16:56):
elsewhere test versus personal resources test. There was once upon a time, several iterations ago
under the SBA's SOP, that a personal resource test required banks to kind of create a formula
kind of created a template to measure personal resources. Credits elsewhere really talks about

(17:16):
the lender's responsibility to determine if some or all of the loan proceeds. It's not available
from the applicant, maybe the borrower, or any owner with 20% or more. What does that say? For
example, if I have $2 million of liquidity personally, and I'm borrowing under the SBA
program at $1 billion, the SBA's position is, well, why do you need government subsidy and

(17:42):
or government assistance? You have personal resources that are in excess of what you're
borrowing. You don't need the government's help. That's the determination that the SBA is now
placing the onus on lenders to determine credit elsewhere. If owners have reasonable funds set
aside for, let's say, future possible events, and those could be medical expenses, educational
expenses, other businesses, retirement needs, working capital, it says, bank, you need to make

(18:07):
a determination whether or not this ownership group is eligible to borrow under the SBA,
but they did not further require what was once known as a personal resource test. In other words,
measurement, create a formula, include that in your memorandum. Lenders are simply to make a
determination. Hey, does this guarantor or any guarantor, indirect or direct, have personal

(18:32):
assets in excess of the amount needed for the SBA to provide a guarantee for a lender to make that
loan? And that's kind of where we are. And again, that is a rollback minus the personal resource
test. So, and Jim, what are your thoughts on the revised compliance responsibilities and how they
shift away how your banks operate? As I mentioned before, you know, it's a change to ownership has

(18:58):
to be 100% U.S. citizens, nationals, LPRs. So, a bank now has to do a little bit more digging
on the buyers, on the investors, and there's a six-month look back as well for the ownership.
So, if someone was ineligible six months ago, typically they're still ineligible. So, we have
to verify the LPRs, for instance, in a certain form. Undocumented non-citizens can be a limited

(19:23):
guarantor, but they can't be a full guarantor. So, there are some changes there and some more
documentation that we'll have to do in the underwriting and closing stage. I agree with that.
I sort of take a view of compliance as, well, I like to define it as three lines of defense.
Business development officers like Jim and I, they're client-facing, we're front-end. Then there's

(19:44):
your credit risk team. That's the second line of defense. And the last but not least is your
Closest Services Process Packagers. They're sort of the third line of defense. And I think the
onus from an increased compliance lens is really on that third line of defense. How does that impact
lending? Everyone knows that SBA lending is paper intensive and it's not a fast turnaround. So,

(20:06):
we may get back to the days where the lending cycle may be increased slightly and loans may
take a little longer to process, underwrite, approve, close, and fund. It's all in the spirit
of best practice included lending. And where I like to dive in with that one that I think is
an immediate impact is projects that involve construction. It may take a little longer in the

(20:27):
addition of due diligence. We're in an environment where project contingencies, once upon a time,
you can get away with 10% in your underwriting. That increased to 15% now in your underwriting.
Today, because of where we are with supply chain, this word that we're calling tariffs and so forth,
a lot of lenders are now requiring 25% in its contingency. Projects in the construction space

(20:49):
are either running out of time or running out of money. The adequacy of the interest reserve,
that's going to be, in my opinion, a stronger focus on general contractors and their ability
to deliver. Macroeconomics says there's some kinks in supply chain. And then again, this
word called tariffs of just increasing prices arbitrarily. So compliance-wise, I think there's

(21:10):
going to be a tightening in construction lending. There may be a little longer lending cycle times
in terms of getting to the funding, getting to the money. And then I think banks are going to
not tighten up their credit risk appetite, but tightening up their processes, their best practice,
and just simple prudent lending is where I would go with that question.
Talking about best practices, I'm curious how lenders are expected to verify the citizenship

(21:34):
and immigration status and loan applicants in this new SOP, Jim?
As I started to mention, so really just more forms, more documentation,
verification. We have to do the look back. So we'll have to do more stuff. Usually,
the video upfront, people like me, people like Joe, we're going to ask a few more questions upfront,

(21:57):
save that later on, hopefully, and make the job easier for the underwriters and closers.
So just making sure what the ownership structure, who's all involved. And even later on,
when we submit to the SBA for the authorization PLP number, before it wasn't so strict. If we

(22:18):
had a bunch of investors, minority investors, whatever, now we have to submit at least 81%
of the ownership there to show who all the people are regarding citizenship, et cetera.
So a lot of banks like us committed that much anyhow, but overall, I think more banks might
have to tighten up that process, just showing who all the ownership structure is, who's involved.

(22:42):
Joe, with the elimination of the do what you do philosophy and underwriting,
what specific changes should lenders implement in their evaluations?
I have a tendency to smile when you begin to talk about do what you do,
because it kind of refers to relying on the bank's lending policy for similar
non-guaranteed loans. In other words, your approach to underwriting is similar to how you

(23:03):
do commercial conventional lending. And the bottom line is SBA lending and conventional lending
are incongruent by design. You'll never really line up with what the SBA SOP allows you to do
versus the lender's credit policy. So in my opinion, that guarantee provides a credit
enhancement to allow a lender to make loans that otherwise are undesirable according to

(23:25):
the lender's policy, but you can't really do what you do. And my opinion, we're going back to the
lending environment and the credit risk appetite from, again, 2017 to 2019. But the simple fact is,
in my opinion, just kind of ear to the ground on industry players, most lenders did not shift
their credit risk practices to do what you do. Some lenders suffered their approach and operated

(23:50):
under the SOP with items like not taking second liens on guarantors, personal residents,
waiving life insurance requirements, not verifying tax returns with tax transcripts.
And to me, that's somewhat a little loosey-goosey. That's not best practice. It's just because the
SBA kind of remained gray or silent. And it says do what you do in your bank's credit policy.

(24:11):
The program by design are apples and oranges, so it's tough to do what you do.
But I'm sure Jim could put a thumbprint on this and stamp it. But I think where we are today is
a preferred lender must exercise their PLP status, which means, hey, the updated SOP does not allow
a lender to submit loans under what's called general processing. Ultimately, you can't make

(24:32):
that risky gray area loan and kind of send it to the SBA to get them to put their thumbprint on it.
The SBA says, look, if you are a preferred lender, we trust you to follow the guidance of the SOP.
Don't call us asking us to put our thumbprint on something that you know. If you're going to act
like you're going to do what you do, you got to have to exercise that PLP license. And you can't

(24:53):
go to the desk anymore and kind of get that thumbprint where you would make a riskier loan
or a loan in the gray box without exercising that status. So the do what you do again,
I don't think most banks kind of went wild wild west and kind of did what they wanted to do anyway.
Most didn't deviate. But now, you know, things called the SBA questions and 7A questions,

(25:15):
that inbox, the flooding of that inbox is kind of going away. Exercise your PLP preferred status.
There's no longer a GP window for you to go get that secondary thumbprint on things that you know
are in the no-go zone. But that that will be my commentary around do what you do.
Jim, what challenges do you anticipate for lenders in complying with the increased

(25:38):
responsibilities outlined in the new SOP? Well, you know, I think we kind of started the
dressel here and there and you hear it between the lines here. But you know,
basically more compliance, more documentation, might have to jump through a few more hoops.
And you know, everyone kind of gets upset sometimes at the change at right up front. But

(25:59):
really, when you back up and look at it, you know, these changes, again, like Joe said,
some of us have already remained at that level. So we're not really, it's not that big of a change.
But some of these new things are going to help the performance overall. They're going to help
tomorrow. We're going to help against fraud. So there are good things about this. But yeah,

(26:20):
there's going to be more documentation about the investors, about citizenship, the construction
oversight. So maybe until we adjust, maybe there's going to be a little bit longer process. Maybe
there's going to be a little bit of fighting on our ground, fighting, tweaking our processes at
each bank. And then, you know, the whole community brokers included, just getting familiar with all

(26:42):
the new things that really, whenever a new SOP comes out, you know, we have the rules. Sometimes
they're not crystal clear. So people may even say they're vague. I'm not. But maybe once in a while,
we get a little more clarity as the time moves on, there's actual deals, there's some technical
memos that come out and kind of clarify things. I think that's kind of where we are now.

(27:06):
We're learning and there's going to be a little more compliance and documentation. That's okay.
Could you explain the revisions made to the construction lending provisions under the new SOP?
Yeah, so a little bit tighter. So like for instance, one thing was, you know, there's
some bond requirements and the last SOP, it was moved up a $500,000 level. Now it's moved

(27:30):
down to $350,000. So there's going to be more loans that will require bonding or risk mitigation
of some sort. As Joe mentioned, we're moving to do what you do. Some lenders probably,
they may have kind of gotten a little more lax on the process. Lenders like us, they direct that,
you know, in some cases regarding the site visits, disbursements and reviews

(27:55):
after the terms of those stricter levels of the life insurance, just the overall process,
the oversight and reviews. Again, a lot of lenders I think stayed at that level
from the previous SOP, what was required. Again, all this is made to protect the borrowers, you know,
whether it's some quote shady trucker people or just this process can be complicated with costs

(28:21):
and all the steps that go into permitting and construction these days. So this is supposed to
protect and help the borrower overall. Sometimes it just looks like more paperwork, but it's really
a good thing, I think. So do you want to elaborate on your thoughts you've mentioned previously about
general contractors, how this sort of impact them? Yeah, so my experience with some of the challenges

(28:45):
in general contracting, there are various business where the owner operated themselves are general
contractors and DIY, do it yourself. Hey, if I'm running a business day to day, then I want to
expand or build or do something to that extent. Some contractors have said, listen, I'm a licensed
contractor, why would I go out and hire a third party firm to do the work that I do for myself

(29:06):
daily? And some banks have a different approach or appetite on allowing a borrower to act as their
own contractor. I think there'll be some static in those scenarios. Previously, I did allude to
sort of where project costs are coming in. If you do a lot of this type lending, when you say the term
construction, from a risk perspective, there's a real major difference between ground up,

(29:29):
substantial renovation, or tenant up fit and leasehold improvements. They're just three different
animals, if you will. But ultimately, the economics say, if a contractor quoted me a
price today, but I'm not ready to close in or fund that loan to August or September,
then there's absolutely zero way that today's prices will carry forward to three months from

(29:49):
now. Right, material cost changes. Change orders, cost overruns, material supplies, labor,
subcontractors. And again, we're in this environment where this word tariff is just automatically,
artificially, or not. It just gives folks a reason to raise prices arbitrarily. And as a borrower,

(30:11):
a small business owner, and the bank, you can't rely on today's price, and you're going to fund
it somewhere down the line in the future. The draw request process, I think Jim talked about site
inspection, funds control. Five years ago, contractor and borrower submits a draw request.
The bank can pretty much, the lender can pretty much fund that directly to the GC, GC, go pay your

(30:34):
subs. I think a lot of institutions are now hiring third party firms for oversight. From a funds
control standpoint, we're going to fund that to a third party, put the onus on them for lien waivers
and progress tracking and site inspections and so forth. And you're deviating from your bank's
construction loan administration team to now sort of outsourcing and being in compliance with the

(30:56):
SBA's SOP. It's always kind of been there, but I think lenders would adhere to more and kind of
follow a more stringent guideline relative to that type of compliance. Do you think that will
slow down new construction projects or maybe slow down the industry a little bit?
It may or may not slow down the process of how to get to an approval commitment in or a closing,

(31:20):
but it will definitely impact on how fast money gets out the door and how fast an owner has access
to kind of keeping that project on time, on budget. And then us bankers do something called
interest reserves where the loan capitalizes its payments so that the borrower is not paying out
of park at doing construction. Now you are suddenly running out of time, running out of money,

(31:43):
running out of interest reserves and then experiencing change orders and overruns as a
result of how I alluded to. But we have to reprice the lumber. We have to reprice drywall.
My subcontractor changed the numbers on me. When you put all of that in the gumbo,
you create some elasticity that you're just simply not bouncing back from to how things were done
maybe pre-pandemic in terms of that lending cycle process and SOP guidelines. I find it

(32:08):
fascinating. I could spend hours talking about that specifically. My husband's in that industry
in new construction development. So he did like all the buildings, most of the buildings in downtown
Charlotte, the Epi Center, Whiskey River. He did the Cat Bus Station and Asper Hall of Fame.

(32:28):
So I hear both sides of it. He's not the general contractor. He's an electrical contractor, but I
hear different sides of it. So it just intrigues me. I remember what it was like in 2013, how a
lot of general contractors went belly up. Either of you, how did the changes in loan eligibility

(32:48):
for businesses related to marijuana hemp and CBD affect the lender's approach to these sectors?
Joe, you can comment too from your point of view. But I think these changes aren't going
to really change the markets or the availability of capital to this sector because number one,
marijuana generally is still federally not legal. So even though some of the states have

(33:12):
different levels of legality, we have it. Most lenders, in my experience, have not been lending
to this sector or those that are adjacent, some of the CBD and paraphernalia business related.
So I don't think there's going to be a huge change in this sector. What do you think, Joe?
I have a live opportunity and we've talked about the lender's approach to the sector.

(33:36):
I'll give you an example of something I talked to a client about yesterday. He's looking to buy an
owner-occupied building. He's going to occupy 70% of the space and his in-cap for inline retail
space is a C-store, pure C-store, not a gas and C-store, but pure C-store. Well, that business
sells CBD oils. They sell, just call it paraphernalia, the wraps and the pins and all

(33:59):
that kind of stuff. But me as a lender, if I were to go on that site inspection and say,
property, I love it. Business, I love it. But because it's an owner-occupied building and 20%
of it is a tenant, I would imagine the onus is on me to demonstrate and to approve and or vet
that this project is either eligible or ineligible because your tenant has cannabis-related

(34:22):
products that they sell. So I'm kind of feeling that impact right now to say, well, what do we
do about that determination? Because of course, I want to make a real estate acquisition loan to
a business owner that's going to occupy plus 70% of the space. But because they're buying a building
that has a convenience store that may sell cannabis-related products, hey, SBA, is that

(34:45):
ineligible or not? The problem is the SBA probably won't give you an answer. They're going to point
you back to the SOP and say, well, what does the SOP say? Well, I'm reading it. I see what it says,
but what do you say? So that's one area I think from a loan eligibility, lenders are going to
have to take that approach to do the extra due diligence where the SBA may or may not
opine on it. They're going to point you to the regulations and say, read it for yourself.

(35:10):
Well, I'd love to hear next month how that all shakes out for you.
Exactly. Exactly.
What potential advantages or disadvantages do you foresee for small businesses with the new SBA
guidelines in the world of acquisition? I would say the challenges for small business owners

(35:34):
largely remain unchanged. The true impact of how the lenders respond or shift as a result of the
SOP updates, I think a lot of the advantage or disadvantage is on the lender side. An advantage
to small business, I think you get what Jim defined earlier was industry clarity on what's
eligible and what's not. So in terms of loan structure, direct to indirect owners, you should

(35:56):
get some consistency across lenders so that if a borrower is shopping from bank to bank to bank,
lender to lender to lender, they ought to be hearing the same thing. So I think it's an advantage
that they get a little clarity on how can they approach their projects. Disadvantage,
wrong or right, I think it does impact the labor and or hiring practices, the HP visas and things

(36:19):
of that nature, the immigration policy. Disadvantage, seller financing. Disadvantage,
a seller's requirement to maintain limited guarantees under certain circumstances.
That's an impact if I'm a small business owner, I may be at a little disadvantage.
Service-based businesses, you mentioned having your husband as a contractor.

(36:41):
Hey, so for businesses that require licensed professionals, i.e. HVAC companies, electrical
companies, plumbing companies, banks feel a little bit differently about lending to a borrower that
doesn't carry the license that's required by state to operate that business. So in other words, if a
change of ownership deal were to occur, what most lenders were doing over the past two or three years

(37:05):
would say, hey, we'll finance 99% of the change of ownership. That seller stays in for 1% ownership.
Why? That seller has the license required to run the business. Today, if that were to occur,
that seller, whether they're 1%, 20%, they're going to be required to provide a limited guarantee
for 100% of that loan for two years following that loan disbursement. That's a game changer.

(37:30):
That's an absolute game changer of, Heather, how you do your business, how Jim and I
structure loans. But from a lender standpoint, it's not necessarily a disadvantage, but if I'm
a small business owner, wow, how I convinced the seller to guarantee my new $2 million loan.
That's tough. That's pretty tough. Another advantage I would think would be

(37:54):
tax transcript verification. Once upon a time, hey, we would all have to rely on tax return,
tax return, tax return. SBA has softened up the requirement to say, hey, if you're buying
a portion of a business, what happens when a multi-unit operator, hey, I have five of these and I
want to sell two, they will allow you to do things such as CPA prepared or reviewed financial

(38:18):
statements, sales tax records, occupancy tax records to verify the seller's financial data.
That's good for us lenders. That's good for borrowers and small business owners
because now you can sort of buy a piece of a company, a segment of a business line or
two out of five units, for example. I think that's a positive. Credit elsewhere,

(38:40):
we talked a little bit about that. Hey, you may be too large of a guarantor to borrow.
That impacts small businesses. The last thing that I would say kind of top of mind would be
affiliates like a borrower that has multiple businesses or passive businesses right now.
If you were to buy a company and install a management agreement, the first thing I can

(39:02):
think of is our hotels. Hey, if I bought a hotel and I don't know how to run a hotel, I can kind of
hire a third party management company to run the hotel on my behalf. Government says you're
not an owner-operator. You're an investor. You know nothing about the direct, meaningful oversight
of this business. If I'm buying a business and I put a management agreement in place because

(39:22):
somebody else is going to run it, they're like time out. You're an investor. Yeah, and you're kind
of... Am I explaining that correctly, Jim? You're kind of an investor. You're not an operator.
This is not... Because I get a lot of that.
Yeah. They kind of made passive businesses ineligible. You kind of need that direct
oversight. Now, it doesn't mean you can't have a management agreement. That management company

(39:46):
just simply doesn't have discretion to manage the operations. They can't make decisions. They
can't provide oversight. They can just handle the day-to-day operations that you choose to handle.
So it could be a daily operations manager. Right. And I use hotels because that's the
first thing to kind of come in mind because I've seen... Right. I was thinking service businesses.
I get a lot of inquiries for techpreneurs that want to buy service businesses because they

(40:07):
see the profit margins are good, but they really don't know anything about plumbing or construction
or HVAC. Correct. So as of June 1, that's a no-no. That's very interesting. In your opinion,
how do these changes align with broader trends in the lending industry and small business finance?
You both should answer this. Jim, you want to take a stab at it?

(40:29):
I think some of the things that you just mentioned come to mind. And it'd be interesting to see how
we address them because a lot of... There's a trend in the industry online and social media things
that people can buy businesses and not necessarily have the experience and things.
So that's not always a great direction to point some of these buyers in because they're trying

(40:50):
to buy a business that needs a license. They're trying to buy that HVAC or plumbing business,
but they don't have the experience. So I think some of those trends might be troubling, especially
with the new SOP because they can't just hire a general manager and they can't use the seller in
the same way as they did before with the minority ownership because of these new changes. So how are

(41:13):
they going to address that if they don't have the license, if they don't have the experience?
Can't really rely on the seller in the same way. Can't really do things the same. So some of those
challenges, I think, like anything in these SOP changes, the market becomes creative. We find
innovations. We find other ways to do it. And I think that's what we're going to see here.

(41:34):
Keyword in your question, Heather, lender responsibility.
You would be amazed at how all of us read the same language and come up with different
interpretations of what it says. So with ownership, in my opinion, becomes accountability.
At the end of the day, lenders will be required to know and or understand what the SOP is saying.

(41:58):
Since the announcement, I've had countless phone calls of non-SBA professionals, borrowers,
trusted advisors, et cetera, telling me what the SBA is going to do and what the SOP means.
And it's not me as in Joe Diggs or subject matter expert. It's just a banking institution that
engages in this type of lending. I have customers telling me what the SBA SOP is. I have other

(42:20):
lenders saying, well, it doesn't say this. It doesn't say that. Again, I alluded to 7a questions
where you can kind of bounce some stuff off the SBA for clarity. Well, guess what they do? They
send you back to chapter four, subparagraph two, section three, items 1a and 1b. I'm like,
I just read it. So I think that scapegoat is kind of going to go away and put the onus on the lender

(42:43):
to say, read it for yourself. You know what it says and be compliant. So I take a little
more appetite towards lender responsibility because I think it stratifies how we all as lenders in the
SBA community act and respond, but we're being consistent. We're being fair. We have a strong

(43:04):
understanding of what it says and we're servicing the greater business community with consistency
across the industry. So I don't take it as a bad thing that lenders should be a little more
responsible with compliance because it levels the playing field and we're all kind of singing out
of the same hymnal and we're not doing a disservice to the borrower and to the program. That's kind of
the way I take that. It will be interesting to see, you know, when the lender does go,

(43:27):
you know, something goes on default or something, we ask for the guarantee. How are they going to,
you know, how's the SBA going to interpret that? You say, hey, you interpret this SOP differently
than we intended, but hey, you didn't really give us clarity. So that'll be an interesting discussion
down the line, you know, that clarity. I didn't touch that with Jim. I wasn't going to go there.

(43:48):
I'm glad you went there. It's a reality. Yeah. Well, what percentage of SBA loans default?
It's increased slightly. Yeah, I was just curious. You guys just know everything,
so I figured I would throw that one at you. The reason I think Jim polls, it does vary by industry.

(44:08):
Some industries are pretty solid. Of course, the ones that you can think of like hospitality,
like restaurant, but things that are industries that are subject to high volatility in the
marketplace. What we're being told is the types of businesses are defaulting. I think there's an
increase in absentee ownership. Hey, I live in Charlotte, but my business is in Albuquerque.

(44:34):
Some of those profile types are facing a higher amount of defaults just based on
the nuances around the transaction. Right. Yeah, I'm seeing that. I've gotten a couple of things
I took on that were that kind of situation. What advice would you both give to business brokers
like myself to navigate this new loan application process successfully? I think, you know, good

(44:59):
business brokers probably are approaching it the right way anyhow. They're educating their clients,
both the seller and the buyer, educating them even before they list it, what the issues are,
addressing them as early as possible, especially the citizenship changes, as we talked about the
licensing requirements versus active management. Just bringing the things up sooner and then

(45:25):
digging into the due diligence. I mean, it's just necessary that, hey, address them now,
the equity injection, the seller notes over standby requirements. There's more documentation.
Just talking through it, making everybody aware of it so it's not a surprise later on and so that,
hey, when we come across something, we don't have to change the structure. Trying to

(45:47):
address the structure upfront. Again, Joe and I were talking, there's not always clarity on
everything, but where we can, try to structure the deal accordingly to the new SOP right away,
rather than trying to restructure it later on. Now, there are some deals like I have in house,
I'm sure Joe does. They maybe started under the old SOP and stalled for whatever reasons. Now,

(46:12):
we're having to restructure some of them under the new SOP. That's going to happen.
Just moving forward. Those are my thoughts. Heather, I'm going to talk to you like you're
my sister and give you the inside track. If I were talking to you as a trusted business advisor,
I would say, hey, smaller loan dollar requests may be approached with the same underwriting

(46:35):
stringency as larger dollar requests. There's no real differentiation between a $400,000 approach
versus a $4 million approach. I think banks are just going to say this is how we're looking at it.
Quality of financial reporting, I would say Heather, number one kickoff right now are,

(46:56):
and this is just the truth of the matter, hey, a prospective borrower in a buy-sell transaction,
they're going to show you a PFS because they don't want the seller to believe, hey, I got all of
these assets and money. They're going to show me the bank, another PFS, the one that I'm going
to make sure is accurate and correct. The differences between the PFS you see and I see,

(47:16):
just know that there's a difference. Deals that require projections,
projections that need assumptions. Well, if those assumptions are kind of aggressive and
pie in the sky, guess what my credit partner is going to do? They're going to give it a haircut
and they're going to whack it. So I would say, Heather, send me realistic projections,
historicals, pro forma, add backs. Hey, we can't add back everything under the sun. It's either

(47:41):
going to get kicked out in the risk analysis or in the third party business valuation.
Seller financials, the quality of those. For example, we're right in that period. Hey,
I have a 22, a 23 tax return and the seller has filed an extension. And banks today are saying,
look, it's June of 2025. I need to know how the company performed in 2024. And unless they file

(48:06):
that extension, I mean, unless they actually file the return, I'm uncomfortable moving forward with
management prepared financial statements that require add backs or the quality is somewhat
questionable. I believe where we kind of are in this cycle with this SBA SOP kind of rolling out.
So I would attack it more for the quality of financial data, the reliance on projections,

(48:28):
the assumptions, valuations. And then I don't think there will be a major difference between
a smaller loan request or a larger loan request. We're probably going to approach it with the same
tenacity. Yeah, I require all my clients now to do business valuation.

(48:49):
I've turned down most of my dollar listings because they didn't want to
invest in evaluation. And I'm like, well, my buyers that come to me,
invest in a business like yours, they want to know that your financials are legit, you know,
and you can back it up and that your asking price is realistic and not pie in the sky. But
unfortunately, brokers are trained to be strict or know how to do the valuation correctly.

(49:14):
Either I put them on a mission to get new brokers on those things.
And there's definitely a trend to see more quality of earnings. In other words,
buyers are more willing if they're wanting to order quality of earnings, which, you know,
isn't always necessary, but it certainly helps track the process, you know, to do reliance.
And it reinforces the underwriting. But I see that as a trend in the past year or two.

(49:38):
Is there anything that you two want to add before we wrap up today?
I mean, I think in general, I think the advantage is, you know, overall, there's probably better
loan performance overall and reduced risk, you know, more transparency, you know, some of the
negative. Well, there might be some limited capital to certain segments, some of the citizenship

(50:01):
changes and some of the other changes, but probably more documentation, more compliance,
more verification. But in general, you know, the market always adjusts, the market always is
created and maybe again, might not do as many of this type of deal that we might see more of another
type of deal. But there's a great demand with the silver, the baby boomers, whatever you want to

(50:26):
call that generation that own so many deals. Now, there's such an opportunity they want to exit.
So it's going to happen. So we just have to be more creative and structured a little bit differently.
I'll double down on everything Jim Sadie is absolutely correct. The SBA program is still a
valuable program outside of the U.S. when folks kind of hear it, kind of vacation and say this is

(50:51):
what I do for a living and this is how it works. There's no other program like that for business
owners on a global basis. The fact that we're constantly trying to make it better collectively
as the lending community, public-private partnerships between lending institutions
and the federal government, pretty strong program. We're just going back to an environment where
things were demonstrative in terms of program works. Lenders are effectively doing loans that

(51:18):
otherwise wouldn't occur. Small business owners still have access to capital. We're just all
playing by the contemporary state of the union, right? This is how it gets done. I agree with
Jim that that lenders will react, borrowers will comply. Long-term health of the program is
still intact and the last time I checked there's still billions if not trillions of dollars being

(51:42):
deployed on an annual basis. Where else can you get that? So I believe things looking ahead,
long-term effects of the changes will be short-lived. The health of the small business
community and the economy is still vibrant. We'll get through whatever turbulence that
we're going through with interest rate environment and lack of economic issues
and ultimately it keeps guys like Jim and I employed. So I'm happy about it.

(52:08):
You two aren't going anywhere. Well, I'd love to thank our guests today, Joe Dix and Jim Fray
joining us today with the CBBA Insight Driving 25. I hope you gentlemen have a wonderful day
and look forward to having you on the show again sometime. Thank you. Thanks for having us. I love
it. Thanks.