Last November we discussed the changes coming to SBA 7(a) Financing for 2018. Small Business Association loans, partially guaranteed by the SBA, have long been a great way to finance a business purchase. For many buyers their availability is a deal breaker. How simple is it to get an SBA loan now, and how does this affect the current market for small and medium sized businesses?
On January 1, 2108, the Small Business Association issued a series of modifications to its procedure for issuing loans, including substantial changes to rules about SBA7(a) loans used for acquisition financing. What changes did they make?
The SBA lowered equity requirements for acquisition loans to 10 percent of the loan, allowing banks to finance up to 90 percent of the deal with the remaining 10 percent coming from the buyer or a combination of buyer equity plus a seller note. At least half of that 10 percent must be in cash from the buyer.
The SBA also extended the seller standby rule to the life of the loan. Formerly, the standby rule extended through two years, but now seller debt cannot be considered part of the equity unless it is full standby. Fortunately, this only applies to the equity part of the deal, and, in many cases, that deal can be structured with a second seller note, with the buyer making payments to the seller from the day the deal closes.
In addition to these changes, the SBA loan programs are now available to some buyers of franchise businesses. This applies only to buyers of franchises that are listed on the third party registry FranData. This is a list of franchisers that are eligible to receive SBA guaranteed loans. The franchise buyer must also include complete a standard franchise-agreement addendum form.
Of course, individual lenders will have their own rules about risk and may require higher amounts of equity in order to extend SBA loans. The above rules are only minimum requirements of what is necessary for the government to guarantee these loans. Still, buyers have plenty of reasons for optimism, including President Trump’s new tax cuts and regulation cutting. Additionally, rising interest rates give banks more incentive to loan money. An increase in SBA loans in Q1 of 2018 would seem to confirm that buyers agree. SBA loans have increased 20 percent year over year.
If you are considering selling your business or purchasing a business for sale, there might not be a better time than today to do it. Contact Calder Capital if we can help facilitate this process for you. We are here to make business deals happen.