Many green industry merger & acquisition transactions involving smaller companies have traditionally been financed through loans guaranteed by the U.S. Small Business Administration, primarily its 7(a) program. These loans are made by participating financial institutions and guaranteed in whole or in part by the SBA.

As has been widely reported, there has been a steep decline in SBA lending over the past year. This has been due to a variety of factors, all of which in one way or another emanate from the credit crisis. First and perhaps most importantly, banks’ primary source of liquidity to make these loans has come from their packaging and reselling them on the secondary market, freeing up the funds to make new loans. The secondary markets largely locked up with the events of Fall 2008. The lock-up was especially acute with respect to SBA loans because under then-existing SBA rules, interest rates on SBA loans were required to float based on the bank’s prime lending rate. With the credit crisis and the various attempts to stimulate the market, including the Fed’s moves to lower the discount rate to historic lows, the secondary market’s interest in SBA loans that float with prime was even more limited. In response, the SBA has amended its rules to permit SBA loans to float with LIBOR (the London Interbank Offered Rate, a benchmark rate that theoretically could be more stable). This was a positive move for the availability of SBA financing.

Another issue developed in early 2009 when the SBA issued a new standard operating procedure which stated that henceforth the maximum amount of goodwill that could be financed was the lesser of 50% of the loan amount or $250,000. Goodwill is roughly defined as the excess of the amount of consideration in a business combination over the value of the tangible (“hard”) assets acquired.  This seemed like the end of the use of these loans for business acquisition transactions.

Needless to say, this development resulted in considerable concern on the part of small business owners, business brokers and others with an interest in small business merger and acquisition activity and a corresponding amount of lobbying. Subsequently, the SBA announced that, through August 31 when additional guidance is anticipated, that loans with goodwill amounts exceeding these levels would still be considered but they would be reviewed on a case-by-case basis by the SBA in Washington. To many, this sounded like empty words with the likely result of few transactions being approved and additional red tape and delay.

Recently, several SBA lenders have stated that they have successfully made loans with goodwill values exceeding these levels and that there was no significant additional delay in obtaining approval. This is good news indeed for the green industry merger and acquisition marketplace. We will continue to monitor developments closely.

An additional positive development is that the stimulus act completely eliminated borrower-paid SBA guaranty fees through September 2010.  These fees are as high as 3.5% of the loan amount.

Ron Edmonds

The Principium Group

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