SBA Tidbits

Cheryl Beer, Sr. Vice President

Cornerstone Bank

Whether you are a seasoned broker or just beginning your career, information about SBA loan programs can help you steer your buyers and sellers in the right direction when structuring the sale of a business.

The SBA 7(a) loan program is a term loan program that is generally guaranteed 75% by the U.S. Small Business Administration.  A qualified bank underwrites the loan request and submits the loan to SBA for approval.  The Borrower must be an operating business, be organized for profit, be located in the United States (includes territories and possessions), be small (as defined by SBA) and demonstrate a need for the desired credit.  Terms are generally ten years for business acquisition loans and twenty-five years for real estate purchases.  The maximum rate is Prime + 2.75%.  Eligible uses of proceeds include the acquisition of real estate, equipment, inventory and goodwill and for working capital.

The SBA 504 loan program is strictly for the funding of real estate and large equipment purchases.  A typical 504 structure includes a 50% loan by a Bank, a 40% SBA debenture at a favorable rate and a 10% down payment.  The down payment may increase to 20% for special use properties and new businesses.  The SBA debenture is a fixed rate loan for either ten years for equipment financing or twenty years for real estate financing.  The February 2012 twenty year debenture rate was 4.7%.

Most SBA lenders are willing to pre-qualify your businesses assuming a strong buyer.  The SBA loan program is designed to finance some goodwill, but the buyer must have liquidity and personal collateral.  SBA 7(a) and 504 loans are great options for financing business acquisitions.

An SBA-guaranteed loan may be used to finance a change of ownership that includes intangible assets.

(1)   If the purchase price of the business includes intangible assets (including, but not limited to, goodwill, client/customer lists, patents, copyrights, trademarks and agreements not to compete) in excess of $500,000, the borrower and/or seller must provide an equity injection of at least 25% of the purchase price of the business.

(2)   (Seller equity is defined as seller take-back financing that is on full standby (principal and interest) for a minimum of 2 years.) The borrower and seller will agree how much equity each will provide. For example, the borrower and seller may each provide half of the equity or the borrower may provide 15% and the seller may provide 10%.  Any seller financing that exceeds the 25% equity requirement does not have to be on full standby.  It just needs to be subordinate to the Bank financing.

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Cheryl Beer is senior vice president of Cornerstone Bank, which is a GABB Platinum sponsor.