New SBA Loan Rules Make It Easier for Borrowers to Acquire Businesses
On January 1st, 2018, the SBA enacted a series of new rules making it easier for individuals to use SBA 7(a) loans to purchase a business. Specifically, the SBA modified its Standard Operating Procedures (SOPs), including SOP 50 10 5(J), which reduces equity requirements for business acquisitions and makes it easier for for borrowers to get funding for franchises.
What were the SBA’s Previous Equity Requirements for SBA 7(a) Business Acquisitions?
The SBA’s previous rules for acquisition loans required that deals with more than $500,000 in goodwill needed 25% seller note/buyer equity. In comparison, acquisitions involving less than $500,000 in goodwill needed 20% seller note/buyer equity to be approved. Just to recap, 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.
A buyer note is a form of debt security issued by the buyer of a company to the seller, in exchange for partially financing the buyer’s acquisition. Buyer equity, in comparison, is the cash down payment that the buyer themselves is investing in the business.
New SBA 7(a) Acquisition Requirements Reduce Equity Requirements
As a result of its new policy, the SBA has reduced buyer equity requirements to just 10%. This means banks can provide up to 90% of the funding a borrower needs to purchase a business. Therefore, a qualified borrower would only need to provide 10% of the loan amount in the form of cash or a seller note. Of that 10%, 5% needs to come directly from the buyer (in order to make sure they have some skin in the game.) However, the other 5% can be derived from the seller note. So, by combining a seller note with an SBA 7(a) loan, buyers can now achieve up to 95% of the financing they need to purchase a business.
New Rules Also Make It Easier for Borrowers to Get Funding for Franchises
In many cases, SBA loans, including the SBA 7(a) loan, can be difficult to get for franchises, as the SBA often classifies franchises as affiliates instead of independent small businesses, disqualifying them from SBA eligibility. However, new changes to SBA’s loan policy means that SBA loan-eligible franchises are now listed on the SBA Franchise Directory. Each franchise on the list can now be identified with a SBA Franchise Identifier Code. This helps lenders quickly identify the status of any franchise on the list. In some cases, an addendum, an additional part of the loan agreement, is required to qualify a franchisee for an SBA loan.