No one knows the importance of small business to America better than business brokers and the sellers and buyers of small businesses. And if you’re reading this BizBen blog post/article, then you should be outraged over the recent action taken by the SBA to restrict financing for goodwill in SBA 7(a) loans. This action strikes at the very heart of small business in America by creating unjustified and unwarranted restrictions on business transfers. This action hurts you.
I'm certain that many of you reading this article are well-informed on this issue, but for anyone not familiar with it, here’s a quick précis: Effective March 1, 2009, the SBA imposed a financing limit for 7(a) business acquisition loans that capped the goodwill portion of a loan to one-half of the loan amount, or $250,000, whichever is the greater amount. The SBA’s rationale – the closer the loan amount is to the fair market value of the assets, the lesser the amount of any potential loss.
From the SBA's funding perspective, this action has a rationale. Because in spite of the lip service paid by politicians on both sides of the aisle to small business, the SBA has always been handed the short end of the money stick. A good example – the recent $787 billion TARP bill allocated just $730 million to the SBA. That’s right – just 1/10th of 1% went to support the segment of the U.S. economy that employs 50% of all workers and creates 98% of all new jobs. The rest went – well, only a few know, and they’re not telling.
But regardless of SBA’s funding issues, this decision is not the answer to solving the agency’s loan problems. Here’s why.
1) This policy discourages lending to good businesses and encourages lending to bad businesses. Earnings generate goodwill, so the very best businesses have lots of goodwill while the worst businesses have little or no goodwill. There is simply no logic that supports refusing loans to the best of the small business community while making loans to the worst members of the community.
2) The SBA has no empirical data supporting the notion that higher goodwill equates to higher losses. Since all good businesses have lots of goodwill, and good businesses are the most likely to succeed in good times or bad, logic alone supports the opposite conclusion.
3) This new policy does not address the core SBA problem of banks making bad loans. Instead, it places an arbitrary cap on goodwill in the hope that smaller loans backed with higher assets will cure the loan loss issue. But as we business brokers know, the marketability of typical business assets is questionable, so it’s doubtful that “higher” assets will turn into lower losses for failed loans. The answer to bad SBA loans is to stop making them, not to redesign them.
4) This new policy is discriminatory. It discriminates against the most successful members of the small business community by denying them access to funds offered to the less successful members of that same community. How does our government justify denying its hardest working, biggest contributors to economic growth the same services offered to others?
5) This new policy is crippling SBA lending. No prospective purchaser in their right mind is going to put up the $3,500 to $7,500 in fees to test the SBA’s willingness to grant an exemption to the goodwill cap (yes, they are temporarily accepting requests for an exemption). Everyone knows that the bureaucratic process is founded in the principle of self-preservation, so the likelihood of an SBA employee approving a loan outside of guidelines is at best highly suspect. Recent SBA lending activity supports this conclusion.
Right now, the SBA is “evaluating” this policy, so now is the time when you personally must take action. Send a letter or an email to Senators Feinstein and Boxer and your congressional representative. Use the sample letter or write on your own. Tell them to take action to remove the goodwill cap from SBA 7(a) loans. And be sure to emphasize the impact this action is having on SBA lending and the economy.
Don’t delay. America’s future – and yours – requires it.
LINKS TO ADDRESS OFFICIALS:
Senator Diane Feinstein:
http://feinstein.senate.gov/public/
Senator Barbara Boxer:
http://boxer.senate.gov/
Find your Congressperson:
www.house.gov/zip/ZIP2Rep.html
About The Author: Ken Oppeltz, CBB, CBI, M&AMI. Business Broker & Managing Principal, Vanguard Resource Group, San Diego assists those selling or buyinig businesses throughout the San Diego County area. You can reach Ken about his services direct at 858-391-3388.
Watch for more blog posts / articles from me in the future!
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