Why 2018 Will Be Better for SBA Loans?
Looser Rules To Make It Easier for Digital Business Buyers
Many of us remember the days, not long ago, when getting approval for an SBA loan had about the same probability as the Cleveland Browns winning the Super Bowl. There was about a three-year stretch, from 2008 to 2011, where small business loans became a virtual impossibility.
Things have steadily gotten better. And 2018 promises to be a game-changer. New rules will go into effect that make it even easier to help entrepreneurs get the startup capital they need.
New SBA Rules to Help Borrowers – Mostly
There are quite a few rules changes and clarifications. Many of them involve larger transactions, where the value of the business goodwill is above $500K.
You're going to be seeing a lot more loans approved with just 10% down payment. It’s been common for 10% down deals to be restricted to purchases that include the real estate. Not so much anymore. On the flip side, It's going to be nearly impossible now for creative buyers to somehow carve out a structure with no infusion of capital.
The 10% down payment can be all buyer equity. It can also be a 5%-5% split between buyer and seller or 7%-3%. This equity can be in the form of cash, a seller-carry-note or "assets other than cash".
That term “assets other than cash” includes the goodwill and intangible assets of the company, which could be trademarks, patents, copyrights, web URL’s, trade names, customer and email lists, a wide assortment. Here’s the joy of it. In some cases, the “assets other than cash” will account for the entire 10% injection of equity for the down payment, so no added cash would be needed by the buyer.
Another favorable change involves the length of time the SBA will allow the seller to remain involved with the business. Currently, most Sellers are forbidden to remain active in the business longer than 12 months. Lenders think it’s risky when a Seller sticks around too long. But that restriction will go away, giving Buyers the ability to retain the former owner as a longterm manager or key employee.
There will also be a virtual shutdown of the often dreaded “standby” requirement for owners offering a Seller Carry Note. It has been customary for the SBA to impose a 24-month holding period on Sellers who carry a note for the Buyer's benefit. This means payments from the Buyer to the Seller are deferred for two years. Now, with qualifications, there will be no standby requirements on Sellers.
There's a big but. The SBA may, under some circumstances, actually impose a 10-year holding period, which certainly would not be favorable for buyers. That would take a much deeper discussion than here.
Get Pre-Qualified BEFORE You Find a Business to Buy
I strongly recommend buyers spend some time in working with SBA or conventional lenders BEFORE they find the business they’d like to buy. They will help you pre-qualify for certain types of loans.
This does several positive things. Firstly, an already pre-qualified buyer will look far better prepared than most others, which will help in your discussions with Sellers and their brokers. It will also help you better understand your maximum price range and how lenders view different businesses. Then, when you finally make an offer, you'll be way ahead of the game in the approval process.
For online businesses, simple is best. Most internet-based enterprises have little or no hard assets like heavy equipment or large amounts of hardware. Keep the deal structure simple. Avoid earnouts, longterm consulting agreements, performance-based financing.
The biggest mistake I see most buyers make is simply not trying to obtain a loan. Leverage can be a very good thing when it comes to acquiring multiple cash-flow properties. Don't let the time and hassle keep you from making great strategic moves.