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SBA To Offer More Loan Help

Posted by: Stacy Perman on May 19, 2009

As of next week, more small businesses will be eligible for Small Business Administration-backed loans. Such financial help is the result of the SBA’s temporary change in the standard size of its 7(a) loan program that will allow businesses to qualify based on net worth and average income and will be in effect until September 30, 2010. The criteria is that a company (and its affiliates) net worth can’t be more than $8.5 million while its average net income after federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years can’t exceed $3 million.

“This is just one more step we are taking to make sure small businesses have access to capital to keep their doors open and employees working during these tough economic times,” says SBA Administrator Karen Mills. “We have seen signs that small businesses that are just outside the traditional 7(a) size standard are being shut out of the conventional lending market. This temporary change will help those businesses weather these tough times and help move our nation closer to economic recovery.”

Reader Comments

Michael Meyer

May 20, 2009 08:44 AM

I am writing this comment to express my extreme concern over language added in Subpart B section 7(b) of this newest revision of the SOP.

The US Small Business Administration has recently inserted the following paragraph into the new regulations for small business loans (page 139 of SOP 50 10 5(A) Lender Development Company Loan Programs, US Small Business Administration Office of Financial Assistance).

"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."
This action creates a major threat to the future of small business sales and transfers.

Small business loans used in business sales or "change of control" are frequently financed via the SBA 7(A) program. Small business owners, who are retiring, looking to exit due to illness, burn-out and so on; will be forced to simply close their doors if this regulation continues.

In these small business transactions, which number in the tens of thousands each year, the bulk of the value of the small business is goodwill rather than fixed assets. This new procedure will effectively cap small business loans at $250,000. In the opinion of the most business intermediaries and bankers, the sale of small businesses will grind to a halt and thousands will be added to the unemployment lines in the midst of these already difficult times.

The new language effectively caps the amount of goodwill financing to $250,000. This language effectively eliminates an entire class of businesses that are sold in order to affect succession, and keep employees working.

Small businesses are valued on a multiple of cash flow, and lenders provide debt financing based on the company's ability to repay the debt. The SBA 7(a) program is designed to allow lenders to have a guarantee when collateral is an issue. Businesses that are sold by intermediaries, accountants, attorneys, and business owners all have relied on this program for decades to provide the vehicle for them to have an efficient succession plan. "Closing the doors" or providing seller financing does not allow for a healthy transfer of the business to a new owner.

Goodwill, as it stands in the "space" is defined by the value created by the cash flow of the business, less the tangible assets. Large businesses are valued on cash flow, public companies are valued on cash flow, and lender loan covenants are based on cash flow. Why then, would the SBA add language to the SOP eliminating the ability to get financing for healthy businesses that are transferring to new ownership (many of whom may be displaced employees right now), allowing for the business to thrive with fresh insights, and the seller to have a healthy retirement?

This change will eliminate an entire class of Americans from attaining the very thing that they risked everything for when starting a business! Additionally, there are thousands of intermediaries who will be forced to seek other venues for employment, all with the stroke of a keyboard! With the government bailing out everyone else, why in the world would the SBA eliminate the ability for a good business to be sold?

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