SBA Loan Guaranty Changes that make Business Acquisition a Little Easier

With 10,000 Baby Boomers retiring every day and that generation owning 40% of U.S. businesses, there are a lot of existing businesses available for purchase. However, capital post-pandemic is more expensive and very tight. The Small Business Administration recognized this and made some recent and welcome changes to its loan guaranty programs in aid of acquisitions. Some highlights:

• A buyer’s owner injection (think: down payment) can be as low as 10% of the total project cost. That’s down from what had often been 20%.
• More significantly, part of that owner injection can now be from a seller carryback, where the seller holds a note for a portion of the purchase. The seller will need to be patient, as that note must be on full standby for 24 months (it used to be a requirement that the seller’s note was on standby until the SBA portion was paid off, which might have been 10 years!).
  • In the SBA’s Procedural Notice on these changes, here’s the relevant section:
    • “The Lender may use its discretion to reduce the amount of equity and/or equity injection required if it determines that the Applicant needs leverage that exceeds the Lender’s conventional requirements.

1. Changes of ownership:
2. a) Resulting in a new owner (complete change of ownership): At a minimum, SBA requires an equity injection of at least 10 percent of the total project costs, (all costs required to complete the change of ownership, regardless of the source of funds) for such transactions.
3. i) Seller debt may not be considered as part of the equity injection unless either:

(a) It is on full standby for the first 24 months of the 7(a) loan; or

(b) A debt that is on partial standby (interest payments only being made) may be considered equity when there is historical business cash flow available to make the payments, and at least a quarter of the SBA-required equity injection is from a source other than the seller.”

• Also helpful are the reduction or elimination of guaranty fees on some SBA loan products. Previously, borrowers paid a couple of percentage points up front, with these fees helping to offset SBA losses when the agency had to make a lender whole on a non-performing business loan.
• SBA Guaranty Fee (Upfront Fee): Except for Export Working Capital Program (EWCP) loans and SBA Express loans made to veteran-owned businesses, the FY 2024 Upfront Fee, based on gross loan approval amount, including SBA-guaranteed and unguaranteed portions, for loans with a maturity that exceeds 12 months will be:
  • For loans of $1,000,000 or less:00%
  • For loans of $1,000,001 to $2,000,000: 1.45% of the guaranteed portion of the loan up to and including $1,000,000, plus 1.70% of the guaranteed portion of the loan over $1,000,000.
  • For loans $2,000,001 and greater: 50% of the guaranteed portion of the loan up to and including $1,000,000, plus 3.75% of the guaranteed portion of the loan over $1,000,000.

How does all of this play out in real life? Recently, we worked with a client wishing to purchase a business for sale. However, the client had recently bought a home and that purchase depleted his cash reserves to about $50,000. Had the requirement still been in place for a 20% owner injection, the client’s budget would be limited to businesses worth a quarter of a million dollars or so. At 10%, he can now look at businesses selling for half a million. However, if the client finds a patient seller that is willing to wait two years for a portion of the purchase price, that portion can be added to the client’s $50K owner injection. Say the seller is willing to hold a note for $200,000. The buyer now effectively has $250K for their owner injection and can purchase a business worth $2.5 million. That’s pretty good leverage for $50K!

Now, we’ve all heard the saying: “You can lead a horse to water but you can’t make it drink.” Just because the SBA has made these changes does not mean that every lender is on board. Banks still need to make sure that these deals cash flow despite the additional leverage. They can’t afford bad paper on their books, so their due diligence and loan scrutiny is quite high. Not all banks participate in SBA programs and not all lenders fully understand these new rules. However, these changes do represent a possible path forward for the next generation of business owners to take the reins of some of the $10 trillion worth of U.S. businesses that will transition in the next decade.