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Posted on May 28, 2009

Contributed by Ken Oppeltz

SBA Loan Changes Impacts Business Purchase Financing


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!

See all contributions from Ken Oppeltz

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Comments:

Can the buyer and seller get around this problem by changing what they call everything over the $250,000 limit? Can you say it's seller training, or the covenant not to compete? Those are "intangible" assets like goodwill. But I don't know if they are the same for tax purposes. It's in the allocation that I'm referring to, where buyer and seller state the value of what is being sold.

Posted by: Lyla L.

Has anyone learned whether the SBA is going to do away with the cap on goodwill? They were re-considering the limitations they imposed and I think this "deal killer" is suspended for now. But will it be permanent?

Posted by: Chaz A.

Ken, This is a well-written commentary. The Sacramento SBA office said in Jan. 09 their number of loans was down over 80% from the high two years ago. This was even before the SBA goodwill cap. Now it must be worse. We have been successful in getting loans SBA approved over the $250K cap on goodwill. Normally, the seller will need to carryback at least 50% of the intangibles and the SBA portion of the intangibles should not go over $500K. Good deals are still getting approved. Take Care, Mike

Posted by: Mike McGrane, Wachovia Small Business Capital

On the whole a very good argument for doing away with any cap on goodwill. Like many government policies, it makes no sense. And the SBA should know better. One point: You mention the $3,500 to $7,000 in fees to test the SBA's willingness to grant an exemption to its goodwill limit. Haven't those application fees been suspended?

Posted by: David H.

Thank you for bringing this to peoples' attention and for reminding us of how the actions in Washington have such an impact on us doing business--or trying to do business, despite all the hurdles. That's a good idea for us to contact our reps in Congress. They may not understand the impact of the SBA's rules until they hear from those affected directly

Posted by: Jeff K.


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