By Paul Chambliss CBI
The Small Business Administration (SBA) guaranteed loan program (7a) for small business purchases has been on a one-year virtual hiatus, but as of October 1, 2009, the new rules are in place.
The big roadblock that stood in the way of the purchase and sale of small businesses has been removed. The SBA has finally eliminated the cap on goodwill value in a transaction. Previously, they only financed goodwill if it was under $250,000, which limited the sale of a lot of good businesses. Now, transactions with intangible assets (including goodwill) that are valued up to $500,000 can be approved by lenders with no restrictions. When the goodwill is over $500,000, then there has to be a 25% down payment, but there is no upper limit to the goodwill value.
- The purchase price of the business is NOT the deciding factor for the goodwill contingency – it is the value of the intangible assets, which includes goodwill.
- If the value of the intangible assets (goodwill) is BELOW $500,000 REGARDLESS of the purchase price of the business, the deal is subject to 15% down (typical down payment requirement).
- If the value of the intangible assets (goodwill) is ABOVE $500,000 REGARDLESS of the purchase price of the business, the deal is subject to 25% down.
In addition, there is also a new FIXED INTEREST RATE option for (7a) loans. In the past, the only option was a variable interest rate based on the prime rate. Theoretically, there was no upper limit on the interest rate. Now, there is the option to have a fixed rate for the duration of the loan. It will be based on average rates over a 5-10 period and will be posted monthly by the SBA.
This is definitely good news for business buyers and sellers as it looks like SBA financing, which had all but dried up in the past year, will ramp up again.