Upcoming SBA Loan Changes For Business Purchases

SOP CHANGES AT THE SBA THAT MAY IMPACT FINANCING

The SBA is making major changes to their SOP (Standard Operating Procedure) that guide lenders that use the SBA'a 7(a) and 504 program. I have focused on a few that impact business buyers, sellers, and business brokers that will go into effect on August 1, 2008. Of course, each lender's credit and closing departments will make their own interpretations to the changes and lenders will need to answer to the SBA auditors (and risk loosing their SBA guarantee if they stray too far away from the guidelines).

401(k) and ESOP accounts

Use of retirement accounts as down payment have become increasing popular as California resident's home equity decreases. The SBA has made it easier to get this approval by the lender which will speed up closing. If you are not aware of this program (call me), it allows you to by much larger companies (i.e. larger cashflowing firms) without increasing your cash out of pocket.

Equity Injection (Down Payment)

Home Equity/Borrowed Funds. The only way these can be used is if the applicant can show that they have an alternative source (besides business cashflow) to pay back that equity loan

Guaranty

Personal Guaranties
The revised SOP states that each loan must be guaranteed by at least one individual or entity. If no one individual or entity owns 20 percent or more of the Small Business Applicant, at least one of the owners must provide a full unconditional guaranty.

912 Exceptions

The new SOP requires that every proprietor, partner, officer, director, and owner of 20% or more of the Applicant (“Subject Individual”) complete an SBA Form 912, Statement of Personal History. In the previous SOP, the term "officer" was limited to a select group of individuals.

Change of Ownership Transactions:

Maximum Loan Term Maturity: In the past, lenders pretty much did a 10 year term on non-real estate transactions. If real estate was included in the use of proceeds, then we would use a blended term between 10-25 years. The new changes will make it harder for lenders to justify a flat 10 years when there is a large amount of intangibles and working capital in the loan proceeds.

Business Valuations (This is a big change): For loans of $350,000 or more, lenders must obtain an independent business valuation from a qualified source. This pretty much means you should have the report ordered by a bank so it can be relied upon by any lender and is not biased.

Seller-Financing

The revised SOP recommends that lenders should require as much seller-financing as possible on Change of Ownership transactions. Buyers/Sellers and brokers need to beware of large amounts of intangibles and expect the seller to carry at least part of the purchase.

Seller staying on after the sale? The seller cannot remain in the business after the sale as an employee. In most cases he/she will be allowed to stay up to 1 year as a 1099 consultant or contractor.

Lenders can no longer do an SBA loan for the business and a conventional loan for the building. The buyer/new owner will need to do the building later.

SOP Updates

Now that the SOP has had a major upgrade, the SBA said they will issue clarifications and guidelines more often (at least once a year).

Posted on June 17, 2008  |   Email This Blog Post   |   Print This Blog Post   |  All Contributions From Mike McGrane