Clarifying SBA Loan Requirements

By 

I have found that there are significant misunderstandings about the SBA 7-A loan program. Buyers, sellers, accountants, attorneys and even business brokers have misconceptions. Actual SBA requirements are set forth in what is referred to as the SBA Standard Operating Procedure (SOP). Lenders must meet these requirements. Most lenders have policies that exceed the SOP requirement. You can obtain a complete PDF file of the SOP 5010 by going to: http://www.sba.gov/library/soproom.html. There can be significant variation from lender to lender. I want to focus on a few major issues.

Cash Injection
According to SOP, the amount of cash injection required for a business acquisition is really zero. Many lenders typically require 20%. However, some will accept 15% and even 10%, even if no real estate is available. Some lenders will allow cash injections as low as 5% if an established manager is acquiring the company, and 100% financing is available for some medical and dental practices. This does not mean that brokers should focus on injections below 20%. However, if the transaction is strong, and you have the "right" buyer, a lower cash injection can work. Earlier this year we financed two young partners with excellent food franchise management experience to open their first unit with only a 10% cash injection. Since opening that unit, a resale in the same chain came on the market, and the lender is again accepting a 10% cash injection. The 20% figure is the norm, but not a rule.

Collateral
According to SOP, the lender is required to make an effort to take as much personal collateral as is available, if the business does not collateralize the loan. However, if the business has minimal assets, and the buyer has no collateral, there are many SBA lenders who will still approve such a loan. Our firm arranged financing for the acquisition of a non-franchised collision repair business. The tangible assets of the business were worth less than $100,000, and the buyer had little real estate collateral. A loan of $1.2 million closed the business resale transaction. Collateral, if available, will be taken, but is not required to secure an SBA loan, according to the SBA.

Business Experience
A few years ago, some lenders initiated a requirement of 3 years direct industry experience on the part of the business buyer. This is not an SOP requirement. Many lenders, though they require that the buyer have the business acumen to operate the business, do not have a direct industry experience, or profit-loss responsibility requirement, per se. Siegel Capital often closes loans for buyers who do not have direct business experience. In April of this year we closed a loan sent to us by a business broker in the Carolinas. The buyer was moving from out of town and acquiring a Lumber Yard (no real estate involved). He had never owned his own company, nor had any direct business experience. His SBA loan was for $1.3 million, and not fully collateralized. Direct Business Experience is a lender requirement, not an SBA SOP requirement.

Summary and Conclusion
SBA lending criteria of all lenders must meet or exceed requirements set forth in the SBA Standard Operating Procedure Manual. For brokers or borrowers to make the most of the program, they need to understand what criteria have been adopted by the lenders. Brokers should avoid assuming that one lender's requirement will be the same with another lender. For properly priced cash flow business resale transactions, lenders do exist with no, or limited, collateral requirements, the amount of the cash injection can sometimes be negotiated, and direct business experience is not a universal lender requirement.