SBA Lending Update...
Dickens began his most famous novel with the line, "It was the best of times, it was the worst of times." Truer words were never spoken as it relates to the market for financing business acquisitions.
On one hand, a spike in loan losses has forced big names like CIT, UPS Capital, and Small Business Loan Source to either shut down business acquisition lending departments, or close up shop entirely. On the other hand, President Obama's $730 million stimulus appropriation to the SBA should improve access to capital almost immediately. Several new policy recommendations reaffirm Congress's commitment to the 7(a) and 504 programs.
On a more foreboding note, SBA recently announced a limitation on the financing of Goodwill (we'll get to this issue later).
Focusing on the positive, President Obama's American Recovery and Reinvestment Act of 2009 gives SBA a much needed shot in the arm. Specifically, the new law appropriates $730 million dollars of additional funding for SBA's programs. Two of the recommended changes directly impact business acquisition lending and include:
1. Depending on the loan size, SBA's fee usually equals around 3% of the total loan amount. Elimination of this fee will significantly reduce transaction costs related to acquiring a business.
2. Increased of the guarantee percentage from 75% to 90%
This rule applies only to standard SBA 7(a) applications (the Express LOC program retains its 50% guarantee), and requires Certified Lender Program processing. Lenders may still submit loan requests under the Preferred Lender Program (expedited approval) when seeking a 75% guarantee, only.
Both new policies will have a significant, positive long-term impact on financing for business acquisition. The fee subsidy might be used as a selling point to bridge the (inevitable) price gap between buyers and sellers. The higher guarantee percentage will certainly help bridge the collateral gap between buyer and lender on deals heavily loaded with going concern value.
In what appears to be a one step forward, two steps back approach to serving small business, SBA recently capped the use of proceeds allocation for Goodwill. SBA will now limit the amount of Goodwill financed under its 7(a) loan guarantee program to $250,000, or 50% of the loan amount, whichever is less.
The SBA writes:
(1). If the purchase price of the business includes goodwill (or "blue sky"), the lender should explore seller-financing with a subordinate lien to the SBA-guaranteed loan.
(2). The lender may finance a limited amount of goodwill. In no event may the amount of goodwill financed by an SBA guaranteed loan exceed 50% of the loan amount up to a maximum of $250,000.
After hearing pushback from lender and broker groups across the country(spearheaded locally by ROI), SBA agreed to reconsider its position. Late Friday it announced that exceptions to the above rule would be considered on a case by case basis.
SBA conceded that, for loan applications where the request for 7(a) financing of goodwill exceeds the limits set in SOP 50 10 5(A) because the buyer and/or the seller are unable to finance the amount of goodwill that exceeds the SOP limit, the lender may submit the application to the Standard 7a Loan Guaranty Processing Center (LGPC) for SBA's consideration.
What does this mean for buyers and sellers? At this stage it's hard to tell. Clearly we are in a less certain place than we were prior to announcement of the cap. At the moment, SBA has not answered exactly how it will absorb what will certainly be a flood of standard 7(a) applications. Also, the procedure change could not come at a worse time as it relates to SBA's capabilities. A recent effort to streamline the SBA 7(a) program has been incredibly effective at reducing staff levels. Finally, no guidance has been given as it relates to what factors will govern approval or decline of requests for cap exceptions.
The bottom line is that, for transactions with Goodwill allocations over $250,000, higher levels of seller financing, and longer lead times are certainly expected. Setting realistic expectations will become an even more critical and difficult task.