Small Business Loans Now Easier for ESOPs
Signed into law by President Trump on August 13, 2018, the John S. McCain National Defense Authorization Act includes a section supporting the formation of employee stock ownership plans (ESOP) and cooperatives. The actual section buried in the defense bill can be found here (click here to access the full law). The support comes through easing requirements to access Small Business Administration (SBA) loans and education and outreach for small business owners.
The law eases the rules for an ESOP and cooperatives to obtain section 7(a) loans from the SBA. Specific changes include the following:
- Allowing loans to go through a preferred provider rather than through the cumbersome SBA.
- Allowing selling shareholders to retain positions as director, officer or key employee after selling 100% of their ownership interest.
- The loan can now be made directly to the company instead of only to the ESOP trust. To do this, the ESOP trust must acquire at least a 51% ownership interest. If the selling owner retains any ownership interest, they must provide a personal guarantee of the loan. Finally, the loan from the company to the trust can be on different terms than the loan to the company.
- Funds from the loan can now be used to fund transaction cost in addition to directly funding the transaction.
- The SBA can now elect to not require the ESOP trust to provide any equity to make the loan.
In addition to easing some of the SBA lending rules, the new law also educates and supports the use of loans for employee-owned businesses. The law specifically highlighted Small Business Investment Companies and Small Business Microloan intermediaries will receive educational material and outreach to increase the use of funds to make investments in ESOP transitions. Further, the SBA is to establish a Small Business Employee Ownership and Cooperatives Promotion Program. The program is designed to provide technical assistance and training on the transition to employee ownership. It will be administered through agreements with small business development centers.
Most of the new law won’t take effect until 2019. The law received bipartisan support and is expected to be budget neutral. If you have questions regarding these updates, please contact me to discuss how this may benefit your small business.