Goodwill in Relation to SBA 7(a) Loans
Goodwill is an intangible asset that arises when a new owner purchases a business. Goodwill only arises when the new owner purchases the business for more than the tangible and intangible assets, minus the business’s liabilities. In general, SBA loans limit the amount of goodwill involved in a bus
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Goodwill is an intangible asset that arises when a new owner purchases a business. Goodwill only arises when the new owner purchases the business for more than the tangible and intangible assets, minus the business’s liabilities. In general, SBA loans limit the amount of goodwill involved in a business acquisition, as the more goodwill involved in a transaction, the riskier it is for both the lender and the borrower.
The SBA’s New Acquisition Rules Loosen Restrictions on Goodwill
The SBA’s old policy for 7(a) loan business acquisitions required that loan deals involving more than $500,000 in goodwill required 25% seller note/buyer equity, while transactions with less than $500,000 in goodwill only needed to have 20% seller note/buyer equity. However, the new policy permits borrowers to acquire businesses with as little as 10% seller note/buyer equity. The buyer must still put down at least 5% equity, but the remaining 5% can come from a seller note.
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Related Questions
What is the definition of goodwill in relation to SBA 7(a) loans?
Goodwill refers to the intangible asset that arises when someone purchases a business for more than the value of its tangible assets like real estate or equipment. Goodwill typically includes brand value, customer relationships, and employee relationships, as well as any patents, trademarks, and copyrights that a business has. (Source, Source)
What are the advantages of using goodwill when applying for an SBA 7(a) loan?
The advantages of using goodwill when applying for an SBA 7(a) loan are that it can help borrowers acquire businesses with as little as 10% seller note/buyer equity. The buyer must still put down at least 5% equity, but the remaining 5% can come from a seller note. This is a change from the SBA's old policy, which required 25% seller note/buyer equity for loan deals involving more than $500,000 in goodwill, and 20% seller note/buyer equity for transactions with less than $500,000 in goodwill.
The SBA 7(a) Loan Program can also help when other lenders have said no. The SBA doesn't lend money to business owners, but it gives the government's guarantee to commercial loans, up to a set limit. With this guarantee in place, borrowers may be able to access the funding they need.
What are the disadvantages of using goodwill when applying for an SBA 7(a) loan?
The main disadvantage of using goodwill when applying for an SBA 7(a) loan is that the borrower must still put down at least 5% equity, but the remaining 5% can come from a seller note. Additionally, the SBA’s old policy for 7(a) loan business acquisitions required that loan deals involving more than $500,000 in goodwill required 25% seller note/buyer equity, while transactions with less than $500,000 in goodwill only needed to have 20% seller note/buyer equity.
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What are the eligibility requirements for using goodwill when applying for an SBA 7(a) loan?
Goodwill is not an accepted form of collateral for an SBA 7(a) loan. The eligibility requirements for an SBA 7(a) loan are:
- Your business must operate for profit. Nonprofits and not-for-profit businesses are not eligible.
- You must also have some equity in the business — this could mean you already have a profitable business, or you could use your own personal equity as collateral.
- If you have any alternative financial resources, you must have used them first. For example, if you have a personal savings account or are able to get a personal loan, then you must first pursue those options before applying for an SBA 7(a) loan.
- The business owner cannot be on parole.
- You must be doing business in the U.S. or its territories.
In addition to the eligibility requirements, there are a few additional qualities which can increase your likelihood of SBA 7(a) loan approval:
- A good credit score - preferably above 680.
- A history free from recent bankruptcies, foreclosures, or tax liens.
- Having been in business for at least two years.
- The ability to provide collateral for loan requests over $25,000.
- The ability to make a down payment of 10% if your intended use of funds is to purchase a business, commercial real estate, or business-related equipment.
- Sufficient cash flow to meet your debt obligations.
- Sufficient working capital (once you subtract liabilities from assets).
- “Good character” according to the SBA (partially decided based on your track record of managing your resources and day-to-day business affairs).
What are the best practices for using goodwill when applying for an SBA 7(a) loan?
The best practices for using goodwill when applying for an SBA 7(a) loan are to use good bookkeeping, familiarize yourself with the paperwork, know your credit status, and bring your plan.
The SBA's new policy permits borrowers to acquire businesses with as little as 10% seller note/buyer equity. The buyer must still put down at least 5% equity, but the remaining 5% can come from a seller note.
For more on how to fill out the SBA 7(a) paperwork, see www.sba7a.loans/sba-7a-loans-small-business-blog/qualifying-for-an-sba-7a-loan. For more on writing a loan proposal, see www.sba7a.loans/sba-7a-loans-small-business-blog/qualifying-for-an-sba-7a-loan.