Loan amount 7 years interest rate over 7 years interest rate
over $50,000 Prime + 2.25% Prime + 2.75%
$25,000 to $50,000 Prime + 3.25% Prime + 3.75%
less than $25,000 Prime + 4.25% Prime + 4.75%
|Please visit www.sba.com for updated details
|Get things started today by calling 626-572-6990
Q. Are all SBA Loan Programs the same regardless of lender?
A. Absolutely NOT! SBA Loan Programs are very different amongst lenders and this has been a
detriment to many borrowers who have been turned down by one lender and walk away believing that
SBA is no longer an option. Here is how it works.
All participating SBA lenders, both banks and non-banks, must adhere to SBA eligibility guidelines.
These include things like business sales size, employee numbers, for-profit versus non-profit, and so
forth. Each lender is allowed to structure its own credit terms. Here is a simple example:
There is a business sale at a price of $500,000. This business generates enough cash to cover the
new buyer's salary needs as well as the payments on a $425,000 loan. The buyer needs $75,000 in
cash and the deal is done. But wait. The local bank examines the loan as an SBA deal and turns it
down because the company has only $230,000 in assets. In addition, to excellent profits and cash
flow, the bank needs collateral.
The non-bank lender approves the deal three days later as an SBA loan and is happy to do so.
What's the issue here? Once each lender had qualified this business as to SBA eligibility, they each
used different credit criteria to see if the loan met their individual credit requirements. The bank needs
both collateral and sufficient cash flow, while the non-bank lender is satisfied with adequate cash flow
Q. My attorney says that SBA loans are expensive and take a long time. Is this true?
A. There are three different designations assigned by the SBA to its lenders. The first is GP (General
Program), which is for lenders who are still getting their feet wet in the business. Deals with these
lenders can take forever because they are in "training", plus their loans must be sent into the SBA for
thorough checking and secondary underwriting to make sure they meet all requirements. These
applications can go back and forth between lender and the SBA until they are done correctly. It is not
unknown for this process to take from three to six months.
The second designation is called CLP (Certified Lender Program). This designation is assigned to
those lenders who do a fair amount of SBA Loans but still require the secondary approval and
underwriting from the SBA. This process can take up to six weeks. CLP lenders get special
turnaround assurances from the SBA, but bottlenecks often occur.
The final designation is PLP (Preferred Lender). This designation is restricted to those lenders that
do a large volume of SBA Loans and in essence, have received the blessing from the SBA to
approve their own loans with no secondary underwriting through the SBA. The lenders used by BBN
brokers are PLP in almost all states. They are the best and usually turn an application into a
commitment within 10 to 14 days.
SBA Costs: SBA Loans can seem expensive at first glance, but there are definite reasons why
48,000 people use them every year.
Suppose you could buy the business described below and you had to choose from two financing
choices. Which would you choose?
$500,000 price of business
(Cash Flow = $250,000 each of the last three years. Wow!)
Lender ONE offers the following:
$150,000 down payment from you
Loan amount $350,000 for 7 years
Interest Rate: 9% with 1 Point or $3,500 cash
Monthly Payment of $5,600
(Conventional Bank Lender)
Lender TWO offers the following:
$75,000 down payment
Loan Amount $425,000 for 10 years
Interest Rate: 10% with 3 Points or $15,000
Points can be financed into loan
Monthly Payment of $5,600
If you chose Lender ONE, it is probably because you have more than $150,000 in cash and 1 point is
more attractive than 3.
If you only have $90,000 in cash, the SBA option may appeal to you. After all, the monthly cost is
$5,600 under both options due to the longer SBA term.
Suppose you needed an additional $50,000 in cash for working capital to begin operations as the
new business owner. Under the SBA Loan, you could add it to the loan whereas the bank would
require you to come up with the additional cash or a total of $303,500 at closing versus $75,000. Is
that kind of flexibility worth the difference of $11,500 (which is built into the loan and costs you an extra
$151 per month)?
Q. Seller Financing - What is it and how does it work?
A. In its most basic terms, seller financing is the process in which the business owner receives a
certain percentage of the purchase price from the buyer in cash and allows the buyer to sign a
promissory note for the difference. In this way, the seller acts like the bank. The note will have a term
(typically 1 to 7 years), an interest rate (which may be fixed or variable), and a monthly or quarterly
Seller financing is the preferred method of financing used by many brokers. Brokers like it because it
usually accelerates the closing time and doesn't involve the sophisticated underwriting procedures
used by an outside lender that may uncover issues like, excessive pricing, industry downturns, and
numerous other risks from which a lender protects the buyer.
Does this mean you should never consider seller financing? No, but if a business will not fair well
under a lender’s scrutiny, wouldn't you like to know why? If a lender says the business is over-priced,
or there is an accounting irregularity that over-stated cash flow, you may be able to get the business
for less or avoid a potential disaster.
Keep in mind that most sellers will retain ownership of the Cash and Accounts Receivable of the
company. This means you must be very careful to plan for the "Day One" working capital needs of
your new business purchase. Buyers often succumb to the pressure brought by brokers and sellers to
put up the maximum amount of cash and minimize the amount of seller financing required. This leaves
buyers with little cash to begin operations. Also be aware, sellers usually want their notes paid off as
soon as possible and look for terms as short as possible – three to five years. The shorter term
means higher monthly payments. This can create problems for a new buyer, especially one that has
little working capital to begin with.
There are many times when a seller note may be used to compliment outside financing. For example,
suppose the lender likes the deal and offers a loan equal to 80% of the purchase price. If the buyer
has only 10% to put down, there is a gap of 10%. How will the gap be filled? If this lender allows seller
financing, then the seller can make up the difference by taking a note for 10%. The terms of
repayment on this note may involve lender approval, but most sellers are happy to get 90% at closing,
especially when the business has few assets and may not be attractive to many other lenders.
If you do agree to seller financing as a compliment to outside financing, include a clause in the
contracts that calls for the lender’s approval of the repayment terms and conditions. Lenders may
require a seller note to be placed on partial or full stand-by. This means the lender may believe that
the combination of primary and secondary note payments may put excessive strain on the business
and may call for interest-only payments (partial stand-by), or they may require that no payments be
made for 1 to 3 years (full stand-by). This latter condition is usually associated with deals in which the
seller is financing a portion of the required down-payment.
Note: When a buyer has less than acceptable credit, seller financing may be a reasonable alternative.
Subject to the concerns mentioned above, it can be a very workable alternative.
Q. How do lenders analyze businesses?
A. An important factor to understand is that each lender looks at deals differently. Some go to the
collateral as a first step and if there is insufficient collateral, they immediately pass on the deal. Other
lenders are cash-flow based. These lenders look for good sales and cash flow trends and are less
concerned with collateral. Cash-flow based lenders are the lenders BBN brokers uses most
frequently. For this reason, borrowers should never give up on an SBA Loan because one bank said
no. This just means that the deal doesn't fit their SBA requirements. You can still try another lender.
BBN broker is designed to select the best lender for each deal.
Most lenders will require the following as a minimum from the buyer:
10% cash (non-borrowed) injection from a buyer. Some lenders allow home equity loan proceeds to
Direct or commensurate experience in the industry
Good personal credit
Cash-flow lenders look at trends. They have formulas that require the cash flow provided by the
business be sufficient to cover the buyer’s proposed salary as well as the principal and interest
payments on the loan. For example, if the business has cash flow of $125,000 annually and the buyer
requires a minimum salary of $50,000, there is $75,000 left over to pay debt. Using a current rate, a
ten-year term and a lender coverage requirement of $1.25 for each $1.00 of payment, the $75,000
could cover a loan of $415,000.
Most lenders allow the seller to assist with financing. Using the preceding example where we have an
eligible loan of $415,000, if the purchase price is $600,000, we have a void of $185,000. Since the
lender requires a minimum cash down payment from the buyer of 10% or $60,000, the difference
between the $185,000 needed and the minimum cash required of $60,000 (10% x $600,000) is
$125,000. This amount could be structured as a seller note, meaning the seller could offer a note for
$125,000 to the buyer and the buyer would make payments to the seller subject to the lender’s
approval. This is a frequently-used mechanism in small business acquisitions.
Some lenders will only do franchise businesses. Others only do manufacturers and distributors. While
still others will do any business type subject to SBA eligibility. SBA Loans take approximately 45 days
to complete – meaning the time from application to closing. Many people hear stories of the process
taking six months or more to complete. Using a lender classified as "Preferred" by the SBA, results in
significant time savings. Because these lenders do more SBA loans in a week than the local bank will
do all year, they are very good.
*Note: If you are a homeowner and your house has equity, the lender is required by the SBA to put a
lien on your home as additional collateral. Exception: If the loan is fully secured by the assets of the
business (based on lender formulas) they will not ask for the lien on your home
|Get things started by calling 626-572-6990
|Appraisal & Broker for Business & Machinery
SUBJECT: ECONOMIC CHANGES & FINANCE SOURCES
DATE: October 23, 2008
The major new headlines today seem to focus on events that are taking place in the economic areas, markets,
and finance. This has resulted in many changes in the world of finance as we have seen some lenders
complete withdraw from consideration of new loan proposals and all have tightened their lending criteria. SBA
also has implemented changes that tighten their program. It seemed appropriate that I let you know of some of
these changes and my personal comments which might be helpful to you.
At most financial companies, we are seeing an increase in loan requests. This is probably because of the
economy and because of the decline in the number of viable lenders. It is times like this that we feel most
fortunate to have relationships with numerous lenders as lending sources. Our goal has always been to try to
match the type of financing with the particular lender who understands and is interested in that type of loan
request. While the numbers have decreased, there are still lenders we work with who are seeking good quality
Some of the more recent changes are:
Equity – 20% from the borrower is expected. The SBA minimum of 10% did not change, but the lender who
funds the loan has tightened in this area. Depending on the credit request, etc., this equity needed by the
lender can be even higher than stated above.
Goodwill – Goodwill represents a portion of the purchase price that is unsecured by the borrower and
considered at full risk by the lender. The SBA now asks that the lender ask for the seller to provide seller
financing for the full amount of Goodwill. While this is usually not possible, a substantial portion of the goodwill
is now expected in most transactions.
Add Backs - There have been significant changes in this area by both SBA and lenders. For the most part, the
only add backs accepted by the lenders are interest and depreciation. Part of this theory is that the new owner
will likely have the same expenses, so they should not be added back. An exception can be a very large salary
for the seller – a more normal salary for the buyer can be deducted from the past amount paid and this can
sometimes be accepted by the lenders. All add backs must be amounts that are tied back to the income tax
returns and documented.
Real Estate - In the structure of the loan request, we try to use the SBA 504 program when it is to the advantage
of the borrower. While this program is still available, some lenders now prefer to structure these loan requests
under the SBA 7a program instead.
Collateral - The SBA maximum loan is $2 million. As a matter of policy, most lenders require some additional
outside collateral; to be pledged to the loan by the borrower in addition to the assets of the business. This
applies basically to the $250,000 risk exposure (75% guaranty by SBA) to the lender. They look for good
assets that are free of debt. SBA regulations require that the lender take other additional collateral if it is
Experience - important and vital criteria is the experience of the borrower in the particular business or industry
related to the loan request and experience with “bottom line” management. This has always been a vital area of
consideration, but there is more emphasis now in this area to show the strong ability to manage for profit in a
business he is familiar with.
Debt Service - This still varies with the lender, but the usual 1.25 times ratio of cash flow to debt service
appears to have increased to 1.50 times. Without the use of some adds backs, this means the existing cash
flow as per tax returns should support repayment of the debt.
Please do not take the above comments to be negative. I am only being realistic and wanted you to know some
of the things the recent tightening as affected. Each lender now is dong more due diligence in underwriting and
is more conservative in their loan committees. Even so, there is still a good market for solid loans.
The economic conditions, in my opinion, will not improve in the near term and may even deteriorate some. This
makes for opportunities as we will likely see more businesses for sale and more buyers available. I hope these
comments will help you to work with your clients to complete more transactions. We would like to work with you
to make that happen.