The Small Business Loan Program can be beneficial for buyers who are interested in acquiring businesses that do not have sufficient tangible assets to meet the collateral requirements of traditional bank financing.
Working capital has always been the life blood for any small business. The SBA loan program acknowledges this by allowing an appropriate amount of working capital to be financed along with a business acquisition.
“The amount of working capital needed will vary depending on a number of circumstances,” Stearns Bank Vice President/Direct of SBA Lending Tom Ethen said.
Examples of such variables include the type of business (For example, seasonal businesses), whether there is a need to purchase raw materials, if input costs are needed to create a product, or if a business offers extended payment terms to its customers that can create a working capital need.
“All of those circumstances can create a working capital need,” Ethen said. “When you apply for a business acquisition loan, you have to analyze the historical cash flow of the business and determine the amount of working capital that is needed and be sure your SBA lender includes that working capital in the total project costs of your acquisition.”
What If The Transaction Includes Goodwill
Unlike business startups and expansions, most business acquisition transactions include intangible assets. You will often hear the term “goodwill” to describe assets like these. The value of a company’s brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill.
The goodwill in these transactions is typically supported and justified by the valuation of the business but provides no collateral value to support a potential loan. Most traditional financing programs either prohibit or – at a minimum – limit the amount of goodwill that can be included in the transaction.
Due to the flexible terms that come with using the SBA Loan Program, all types of business assets can be financed, including goodwill. This is one big reason why small business owners are turning to the SBA Loan Program for a change of ownership or business acquisition over traditional financing.
The SBA Loan Program has always been centered on cash flow, rather than tangible assets of the subject business. This means that as long as the cash flow of the business supports the purchase price of the business and provides for an adequate repayment for the proposed debt, a loan can be approved, even if the collateral is inadequate.
The Evaluation Process
In addition to adequate cash flow, there are other application characteristics that are considered to mitigate the lack of tangible assets. Some of those characteristics include the management/industry experience of the buyer. The experience of the potential buyer will also be evaluated, as will the buyer personal credit history, overall financial condition and other sources of loan repayment.
Ethen admits creative SBA lenders will look closely at the educational background and prior business experience of the individual applicant for a small business loan.
“At Stearns Bank, we always look for related experience,” Ethen said. “We realize that it is likely that the individual loan applicant will not have prior business ownership experience in the same field. In fact, the individual loan applicant may not even have related employment experience in the same industry. We simply look for related business experience.”
Finding The Right Lender
If you are considering buying a business, you will want to connect with a qualified Small Business Lender very early in the acquisition process. It is essential to choose a lender that is experienced in SBA financing and one that takes a proactive and creative approach in business finance.
“A potential small business owner should look for a bank that is not only a Preferred Small Business Lender, but one that is very active within the SBA program,” Ethen said. “Preferred Small Business Lenders help move the process along faster. Not all SBA Preferred Lenders make it a priority to originate SBA loans with a sense of urgency.”
“Make sure the bank you are working with not only has an innovative approach to loan origination, but also one with a culture of strong customer service.”