Small Business Funding: 2015 Year in Review
Now that we are a few days into the New Year, we thought we’d share some of the highlights and changes we saw in funding this past year.
It was an action filled year in SBA lending. Perhaps the biggest change was the significant increase in SBA loan approvals. Although we are not back to the levels seen in 2011 in terms of dollar amount, as the chart below indicates, there was a 31% increase from 2014 SBA fiscal year to the 2015 fiscal year.
*Source: SBA Lending Statistics for Major Programs.
Part of that increase was a greater willingness from banks to fund loans under $150k. As an example, at Benetrends, we have seen a 420% increase in the number of loans we have funded under $150k. Rollovers for Business Start-ups (ROBS) also played a significant role in the success of SBA in 2015. In addition to the traditional role of providing 100% of the funds needed to start a business, we have seen a marked increase in the number of rollovers used as the capital injection needed for an SBA loan. This has proven to be a powerful tool for entrepreneurs because it allows them to protect their post-closing liquidity – and many banks like the additional benefits of clients using a ROBS program.
But all was not perfect in the SBA world. The SBA was forced to suspend 7(a) lending July 23rd after the program hit its annual loan ceiling with more than two months left in the government’s fiscal year. Fortunately, the issue was resolved in a few short days and lending resumed as normal.
The latest SBA news is in December the Federal Reserve raised the Fed Funds rate which subsequently raised the prime rate from 3.25% to 3.5%. The maximum rate for a typical 7(a) loan is now 6.25% vs the long-standing 6% ceiling.
As far as ROBS go, as more entrepreneurs look to open new businesses, we will continue to see the program increase in popularity. However, along with this increase in popularity, we have seen many new, inexperienced providers enter the space. This brings some concern that many of the newcomers lack the expertise and experience to ensure that the plans they design remain compliant with the stringent regulations required by both the IRS and the Department of Labor. We urge entrepreneurs to perform thorough due-diligence, and ask some of the following pertinent questions when evaluating ROBS providers:
- How long have you been doing these plans?
- How many have you done?
- What certifications do you have?
- What is your guarantee?
- Do you handle the administration or is it outsourced?
- Can I speak to a client who has been audited?
We also continue to see confusion around the differences between a Self-Directed IRA and the ROBS program. Accountants and other advisors fail to recognize recent cases (Peek and Ellis) pertain to Self-Directed IRA’s and have nothing to do with ROBS plans. The two structures are different and are used for different goals. Not understanding which structure to use in each situation may result in a prohibited transaction – and subsequent fines and penalties.
In closing, the biggest takeaway is that entrepreneurs have plenty of funding options in 2016. So here’s hoping to a 2016 full of new businesses and grand openings!