By Ami Kassar, MultiFunding | April 27, 2016
If you’ve read any of my articles before, you’re familiar with my fandom of the Small Business Administration (SBA).
Yes, it may be a government agency, but the loan programs it backs are some of the best available for small businesses. Unfortunately, way too many of those businesses incorrectly believe that they won’t qualify for an SBA loan.
And for any small business thinking about making an acquisition — or an intergenerational transfer — the SBA can be a literal godsend.
In today’s acquisition financing arena, a buyer’s savings are generally a key component. That makes sense, but many would-be buyers have to look elsewhere to fund the remainder of the sale price.
Enter the SBA, with loans up to $5 million.
Advantages of SBA Loans
For one thing, the repayment periods for SBA-backed loans are exceedingly long. If real estate is involved, you might have up to 25 years to repay. And the usual 7(a) loan when other assets aren’t involved generally has a 10-year payoff. In either case, you may well be able to pay off the loan through your earnings.
If you get a traditional bank loan, the amortization period probably would be in the five- to seven-year range.
As an added bonus, if you’re able to pay off a 7(a) loan more quickly than expected, banks generally aren’t allowed to impose prepayment penalties.
And remember how a buyer’s savings are a key component in any transaction? If your finances are strong, there’s a chance you can obtain 100 percent financing, making your savings a moot point.
In addition, businesses typically can use SBA loans to finance a collateral shortfall; that’s valuable for businesses without a lot of hard assets.
By comparison, regular bank lenders will want the entire loan to be backed with collateral — things such as equipment, buildings and inventory — but don’t care about intangible assets such as trademarks or goodwill.
As always, SBA loans are ideal for companies that not only have a good credit rating, but also strong cash flow, which makes a collateral shortfall less damaging to lenders.
Drawbacks to SBA Loans
That said, there are some drawbacks to working with SBA loans.
The lending process can be difficult, even byzantine, at times. The process can be relatively slow and plenty of paperwork is required, too.
You’ll have to do your research of lenders – remember, the SBA itself doesn’t make loans (it only insures them). And just because one lender says you don’t qualify for an SBA loan, there’s always the possibility another one will.
Then there’s the SBA requirement that anyone owning 20 percent of more of the company must personally guarantee the loan.
If a 7(a) loan is used, the seller can’t maintain a business stake after the sale is complete. That might not be a big deal, but you could lose a lot of institutional knowledge. One partial remedy in some circumstances is to use the seller as a consultant.
All in all, these drawbacks aren’t all that burdensome, especially for businesses that take extreme care (as they should) in all financial matters. It’s never wrong to practice fundamentally sound business and financial practices.
And those businesses that are fundamentally sound will find themselves with an SBA-backed loan at reasonable terms — not to mention the financial ability to take their company to the next step.
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