SBA Lenders Offer Advice on Getting Loans Approved

GABB SBA lenders

SBA lenders Kim Eells, Cheryl Beer and Susan Kite presented at the April GABB meeting.

If you want to get an SBA loan to buy or sell a business, get the information to lenders early, be honest up front about potential problems, and expect to pledge assets, including a home, to secure the loan.

That advice highlighted the presentation by veteran SBA lenders to the Georgia Association of Business Brokers on April 26.

Bob Smith of HealthMarkets.com was the breakfast sponsor.
The program was presented by GABB Platinum Sponsor Cheryl Beer, Vice President of SBA Lending at the Piedmont Bank; Susan Kite, SVP and Managing Director of SBA Lending at Signature Bank ; and Kim Eells, Vice President, Business Development Officer  of the Brand Bank.

GABB SBA Power Point Presentation

Audio recording of the SBA presentation.

SBA Loan Program Overview

  • SBA 7(a) – $5,000,000 maximum loan amount
  • Small by SBA Size Standards
  • Operating Company must be “For Profit”
  • 15X Debt Service Coverage, “DSC” (including all affiliates)

The SBA 7(a) program has a $5 million maximum, with 1.15 x debt service coverage, and operating company must be for profit.

Equity injection: minimum usually 20%, but other factors may affect the percentage, including  cash flow,  collateral and experience.

The maximum term of the loan is 10 years for purchase of a business only, 25 years for real estate, and a weighted average for combined  business and real estate.

The maximum rate for the loan is prime plus  2.75%

Collateral required includes business assets and personal assets of guarantors.

SOP rules:

  • The buyer must purchase 100% of the ownership interest in the business;
  • The seller cannot remain an officer, director, stockholder or key employee of the business. If a short transitional period is needed, the small business may contract with the seller as a consultant for a period not to exceed twelve months;
  • If the purchase price of a business includes intangible assets in excess of $500,000, the borrower and/or seller must provide a combined equity injection of at least 25% of the purchase price of the business. In order for the seller financing to qualify as equity injection, the seller note must be on full standby of principal and interest payments for a minimum of two years.  If the total “equity” is greater than 25%, there can be two seller notes.  For example, if the buyer has 20% equity and the seller provides 20% seller financing, there can be two seller notes, one for 5% on full standby for two years and one for 15% with immediate P+I payments;
  • If there is business real estate as part of the change of ownership, the real estate cannot be financed separately by a non-SBA guaranteed loan (unless it is an SBA 504 project) to avoid the 25% cash injection;
  • The lender must obtain a current business valuation from an independent third party chosen by the Bank to justify the purchase price.

How to get your loans approved quickly

  • Get Seller Information as quickly as possible after signing listing agreement
    • Last 3 years tax returns (if sole proprietor, get Schedule C)
    • YTD interim statement to include Balance Sheet & Income Statement
    • Previous  year’s interim statement of same period
    • Agings of Accounts Receivable and of Accounts Payable
    • Listing of all assets being sold – and their market value (with serial numbers for any asset valued at $5,000 or more)
    • 4506-T, properly signed
    • Letter of Intent or Purchase Agreement
  • Manage Seller expectations
    • They will likely have to take a Seller Note of 10% to 15% of sales price
    • They will need to update Interim Financials and Agings to keep them current (every 60 – 90 days)

Buyer Info

  • Get Buyer information as soon as possible
    • Last 3 Years Tax Returns – Personal and Affiliate
    • Recent Personal Financial Statement – give them form 413
    • Business Plan (good template is at sba.gov)
    • Financial Projections (monthly for Year 1 / Annually for Years 1-3)
  • Manage Buyer expectations
    • They will have to put in cash equity of 10% to 25% of sales price
    • They may have to pledge their home or other real estate
    • They will need to assign us life insurance
    • If your buyer has ever been arrested, they need to tell us early so we can get them cleared and processed
    • The loan process is not like buying a home – it may take longer than they expect.

Lender Info

  • Use a lender that knows business acquisition SOP rules
  • Get with us early and use us as a resource
  • Realize that to us, DSC is more important than SDI
  • Have your Seller and/or Buyer prepared
    • with an organized application package
    • with realistic expectations about the loan process
  • The process will be much faster when information is provided quickly when asked

The Panelists also discussed three examples of loans they encountered.

Example 1:

30 year old niche therapy practice that provides occupational therapy, physical therapy and Speech-Language therapy to school systems.

Buyer has owned a business in home health care.

Total Project Costs of $1,950M included Intangible Assets of $1,600M, Working Capital of $300M, Closing Costs including SBA Guaranty Fee of $50M – Seller Financing of $350M, Buyer’s Cash $100M – SBA Loan $1,500M

Only collateral was a 2nd lien on personal residence.

Example 2:

35-year old Commercial Landscaping company – 3 owners in 60s and retiring. Sales price of $1,605,000 included property, trucks, goodwill.  Property valued at $600,000 assets valued at $280,000 with $805,000 goodwill. 2 loans:  Building loan at P+2.5% for 25 years and business acquisition at P+2.75% for 10 years with 6-months interest-only for both. Financing structure: $540,000-property, $448,000-business and assets, $136,000-working capital and closing costs, $263,000 – borrower cash, and $360,000 seller note.  Buyer was ready to close with out-of-state lender when his partner pulled out, changing deal. We closed 35 days after being notified that the buyer wanted us to consider the deal.

Example 3:

distributor of parts for communications companies that service cell phone towers.

Two husband/wife teams with varied sales and management experience

Total $1,211 included $918 GW, seller 225, equity $269, loan $717, 10 years, P + 2.5, $100 Capline

Collateral included personal assets of Guarantors

Why Loan Applications Get Rejected

Delinquent credit history – 650 minimum score

SBA eligibility issues

  • 912 issues
    • Presently under indictment, parole or probation
    • Ever been charged with and or arrested for any criminal offense other than a minor motor vehicle violation? Include offenses which have been dismissed, discharged or not prosecuted.
    • Ever been convicted, placed on pretrial diversion, or placed on any form of probation, including adjudication withheld pending probation for any criminal offense other than a minor vehicle violation?
    • Not citizen or permanent resident
  • Problems with Franchisor
    • SBA failure rate for franchise
    • Franchisor has reputation for not supporting its franchisees
    • Talk to other franchisees
    • Talk to financial institutions who have financed particular franchise
  • Unrealistic projections
    • Use financial advisor to prepare business plan and projections
    • Breakeven analysis
  • Other issues
    • Insufficient working capital and equity
    • Additional support
    • Spousal income
    • Strong franchisor support
    • Strong location
    • Strong credit history
    • Liquidity
    • Management experience

 

Finally, if you get turned down by a Bank, ask for the reason.  The information may help you with another lender or for your next request

 

Contact information for presenters:

Susan Kite

404-256-7734

skite@signaturebankga.com

 

Kim Eells

770-339-2088

keels@thebrandbank.com

 

Cheryl Beer

678-576-9392

Cheryl.beer@piedmontbankonline.com