It’s not just people borrowing for home purchases who are running into more stringent lender requirements. Applicants requesting SBA-backed loans to buy a business will need to comply with new SOPs (Standard Operating Procedures) issued by the Governmental agency, starting August 1, 2008.
The basic requirements that the borrower have excellent credit and that the application package be completed in its entirety when submitted, have not changed. Meanwhile, here’s a quick review of some of the new provisions to be aware of, and a few suggestions for complying with them:
BUSINESS PLAN
More important than ever is the requirement that the buyer
buying the business demonstrates he (or she) has an intelligent, detailed plan for operating the business once it changes hands. Financial projections are a critical part of this plan, as are management ideas, the use of personnel, and a strategy for marketing the company’s products and services. A business plan is not just an academic exercise for business school students, but a vital document for people who need funding to acquire or expand their enterprises.
COLLATERAL
Assets of the business being acquired--inventory and equipment are examples--will most likely be identified as property in which the lender wants a security interest to help secure the loan. But that is not all, as the borrower will also be asked to put up real estate equity, or stocks, bonds or other securities as additional collateral. If the loan seems particularly secure--with a substantial buyer down payment and extremely positive prospects for growth of the business, the amount of the loan to be covered with the buyer’s collateral may be as low as 20%. If, however, a lender feels there is more risk involved, for one reason or another, the borrower may be asked to put up collateral equal in value to 60% of the loan amount.
DOWN PAYMENT
How much “skin does the borrower have in the game” is a phrase that lenders use, informally, to inquire about the level of initial risk assumed by the person taking out the loan. New SBA rules specify that the buyer of a business being purchased in part with SBA guaranteed funds should make a down payment of 20% to 50%. The deal may receive SBA approval with a down payment as low as 15%, however, provided the seller is willing to help finance by taking a promissory note for at least 10% of the purchase price.
WORK EXPERIENCE
The skill set and experience of the borrower are of more importance to the SBA than in the past. Perhaps the business lending community has seen too many executives with general experience leaving, or being “downsized” from their corporate positions and purchasing a business in a field in which they aren’t familiar. A purchasing professional is not necessarily equipped to run an auto repair garage, for example. Offering a small interest in the company to one or more key employees of the firm being acquired can solve this dilemma. By listing people experienced in the business as members of the “ownership team,” the borrower may be able to satisfy this SBA requirement.
PLANS TO MOVE BEYOND “BUSINESS AS USUAL”
Does the prospective borrower/buyer have some ideas for building the business? If not,
SBA loan lenders fear that the company’s revenues and profits will follow the general economic downturn expected in the months ahead. Without an action plan by its owners to boost income, a company in this economy can usually be expected to show declining gross sales and slipping profits. And that is the opposite of what a borrower’s company needs to do if it will be able to generate the funds needed to pay off the loan. A marketing plan is a critical part of a complete package that persuades loan officers to provide the funds needed by the prospective borrower.
While it is getting more difficult for business buyers to satisfy the SBA and SBA-backed lenders, the borrower candidate can improve his/her chances with a solid package that incorporates these five requirements.
