The Small Business Administration has issued its new guidance on business acquisition loans and the news is pretty good for both buyers and sellers.
The new guidance in effect rescinds much more restrictive guidance issued in early 2009 that had raised widespread confusion and concern in the minds of borrowers, lenders, intermediaries and small business advocates.
Under new guidance, the SBA clarified that SBA-guaranteed loans, made under the 7(a) loan program authorized by Section 7(a) of the Small Business Act, can be used to finance the goodwill portion of business loans. If the goodwill component of the loan exceeds $500,000, the SBA guidelines require that the buyer and/or seller contribute 25% in equity to the project. The buyer’s portion would be in the form of the down payment. The seller’s contribution could be in the form of a seller financing. Loans that conform to the new guidelines may be handled under the lender’s delegated authority and will NOT have to be sent to the Standard 7(a) Loan Guaranty Processing Center for review and approval by the SBA.
There may be some impact on the form of seller financing because the SBA guidelines define seller financing that qualifies as “equity” to be on full standby as to principal and interest for a minimum of two years. This definition may cause seller financing to be restructured in some cases, with a component sufficient to meet the SBA standard structured with two-year stand by and the balance as negotiated by the parties.
This level of “equity” is actually less than what is commonly required now. Many lenders look for a down payment in the range of 20% and seller financing in a similar amount. While this may come down as lending conditions improve and competition develops, we do not expect a significant loosening from these levels to develop quickly just because of the SBA guidelines. Individual lenders set their own lending requirements within the confines of the SBA.