Question:
Can you provide an outline on SBA loans and advise the pros and cons of it?
Answer:
By the time you read this, the SBA may have changed the rules! While the SBA has some attractive features, here are a few key pointers:
- The SBA does not lend money. It guarantees loans for small business acquisitions (7a loans) that are then underwritten by traditional banks.
- Fees are high. I was recently involved in a transaction whereby the loan amount was $1.33 million and the fees to the buyer were over $40,000 BUT, the SBA will lend you the money to pay these (isn’t that nice of them?).
- The maximum loan amounts vary depending upon budgets. As of today the maximum is $2,000,000 including real estate. Government fiscal budgets end September 30th every year and programs get shut down as the date approaches. Sometimes they’ll alter the program (or even shut it down temporarily) during the year, so get your paperwork in quickly.
- Use a “preferred SBA lender” bank. They can process and pre-qualify the loan in house.
- The business itself must qualify based upon 2-3 years of tax returns. The lender will generally take the worst year and calculate the total cash flow. Then, they will deduct a reasonable salary for you the owner. The remainder is subject to a formula (usually divided by 1.2) to determine the remaining cash flow to see if it can service the debt load.
- You’ll have to demonstrate to the lender that your background is suited to run the business. Prior failures were directly attributable to the buyer not having the right experience and so they are far more rigid on this aspect now.
- You WILL have to guarantee the loan. SBA lenders are required to go after all available personal assets from the buyer as collateral however; you can get away with about 40%. Yes, they will require your house if you have more than 25% equity.
On the plus side, you can achieve tremendous leverage as the SBA will lend up to 80% (you put up 20% although they’re now looking at 70%/ 20% from the buyer and 10% from the seller), they have ten year terms plus they’ll also finance any real estate in the deal and blend it with the business acquisition loan for a very favorable term.