Buying a business? Need MONEY? An SBA loan may be the way! New SBA rule changes for 2018 equal new opportunities!
When considering buying a business, many entrepreneurs will look for a loan. Standard commercial business loans can be costly and hard to qualify for, especially for small businesses. They are also risky to the lender! This can leave new business owners left out in the cold.
To even the playing field, way back in 1953 Congress created the SBA.
SBA stands for the U.S. Small Business Administration, an agency of the federal government that aids, counsels, assists and protects the interest of small business owners.
Why use an SBA loan? The government itself does not make direct loans to entrepreneurs, but does provide a partial guarantee to banks and lenders for the money they lend to small business owners. This guarantee protects the lenders interests by promising to pay a portion of the loan back if the business owner defaults on the loan. SBA loans alleviate the risk associated with lending money to business owners and entrepreneurs who may not qualify for traditional loans – thus opening up lending opportunities to thousands of entrepreneurs, start-ups, growing businesses, minorities and veterans.
Some of the advantages of an SBA loan are the many types of loans that businesses can utilize, each developed to suit the needs of their business.
The 7(a) guaranteed loan program and the 504 loan program are the SBA’s largest lending programs. The borrower applies to a lending institution and then the lender applies to the SBA for a loan guaranty. The SBA can process the lender’s request through a variety of methods. Guarantees are up to $4,500,000 of each loan made by participant lenders. These loans typically range from $25,000 to $5 million and are repaid in monthly installments. They can be used for a variety of business purposes including working capital, equipment acquisition, debt refinance, change of ownership, and real estate purchases. Maturities depend on the use of loan proceeds but typically range from 5 to 25 years.
Great! So what’s new to know? There are new changes to the deal structure made by the SBA, effective Oct. 2017, which can lead to new opportunities for borrowers.
The main one is the down payment required by the borrower. The SBA slashed the equity required for most change-in-ownership loans from 25% to 10%, a move that makes financing for acquisitions more accessible. The change is part of a broader overhaul of the standard operating procedure, or SOP, that governs 7(a) and 504 loans.
Another change is, a buyer’s equity injection was typically based on the selling price, but now the total “project costs” is the basis for determining required equity. The borrower is required to inject equity of no less than 10% of the total project costs – which equal the sum of price, working capital and closing costs, including any SBA fees. This 10% equity rule applies to every transaction, regardless of sale price, loan size or intangible amount.
These are the basic rules everyone must follow. However, lenders may apply their own credit policies on top of these rules, which can make deal structures inconsistent, depending on the lender.
It is important for borrowers to know upfront how deals get financed so there are no surprises or false expectations. Phil Reese, an experienced Business Broker, can put you in touch with one of several banks that he has worked with in the past.
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