On August 1, 2008, the Small Business Administration (SBA) implemented some changes that will influence the ability of a buyer to receive funding for a business acquisition. Some of the changes will not affect the average borrower. For example, individuals who are currently on parole or probation are no longer eligible for the program. But other changes will affect the success of future applications for SBA loans used to purchase a privately owned business.
To start with, in every instance the lender must explore the possibility of the seller carrying back a note for an amount equal to the amount of intangible assets to be financed. The seller's refusal to carry a note does not necessarily kill the deal. It is simply documented in the file that must be submitted to the SBA.
Another change is that the SBA now requires an independent 3rd party business valuation for any business purchase loan in excess of $350,000. Besides the fact that this is yet another fee that the SBA is going to roll into the cost of the loan, it has much more significant ramifications: the purchase price has to be justifiable to more than just the buyer. From the lender's point-of-view this makes all the sense in the world as it would theoretically prevent the funding of a transaction that is overpriced.
Another area that has changed significantly is how home equity loans are viewed by SBA lenders. While a buyer may still draw upon his/her home’s equity to come up with the down payment, the SBA now requires proof that the buyer can make that monthly loan payment on the HELOC in addition to what is owed to the SBA. This makes sense for several reasons. Individual banks are given a great deal of latitude as to where the down payment funds come from. Rather than allowing people to buy businesses with 100% (and sometimes more) borrowed funds, many SBA lenders are now requiring that the cash injection into escrow not be residence-related. Another reason for banks to crack down on HELOCs is that the buyer’s real estate has to serve as additional collateral for the SBA loan. It makes sense for the banks to want 2nd position behind the mortgage as opposed to 3rd position behind the mortgage and a HELOC.
In addition to these stricter requirements, potential borrowers are going to find it a more difficult lending environment than it was last year. With the tightening of the financial markets, several banks have chosen to exit from SBA financing. This, along with fewer individuals wanting to borrow in the current climate, has led to an 18% drop in the number of SBA loans in the second quarter of 2008 compared to the same period in 2007.
