With New SBA Rules, What’s Needed To Get Purchase Money

July 11, 2008 - PRLog -- One casualty of the home mortgage meltdown is the increasing difficulty obtaining a loan to buy a small or mid-market California business, according to Peter Siegel, MBA, founder and CEO of BizBen--Businesses for Sale in California, (www.bizben.com), the state's leading online marketplace for buyers and sellers of small and mid-market companies. And, says Siegel, one of the most frequently pursued strategies, getting an SBA-backed business loan, is about to undergo a rules change with the SBA’s new SOP (Standard Operating Procedures), taking effect August 1, 2008.

Borrowers need an excellent credit history and will encounter some changes in requirements for their SPA application, says Siegel, including:

BUSINESS PLAN

A written explanation detailing the borrower’s plans to operate the business is becoming more important, and should include management plans, marketing strategies and complete financial information--a review of the company’s past performance and a projection of income for the future. Authorities at both the lending institution and the SBA will examine the financial information carefully to make certain the business is expected to generate enough money to pay its expenses, provide the borrower with an income and--of course--to repay the loan.

COLLATERAL

While the lender is likely to want a security interest in some or all of the subject company’s assets, borrowers should expect to provide additional collateral, such as real estate, bank accounts, stocks and other securities. The collateral requirements of SBA lenders frequently is 50% of the loan amount although, depending on other circumstances, the lender may be satisfied with as little as 20% of the loan secured with other collateral, or may require other security covering up to 60% of the obligation.

DOWN PAYMENT

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 (carry back) at least 10% of the purchase price.

WORK EXPERIENCE

More stringent requirements relate to whether the skills and experience of a business purchaser are directly relevant to the operating requirements for the business, and may make it more difficult for an individual with general business background, for example, to purchase a company in a specialty field, such as auto repair, printing or food service. One solution for buyers faced with this challenge is to offer a small interest in the company to a skilled and experienced employee--a strategy that has helped satisfy lenders that a borrower-enterprise has, ‘in its ownership,” an individual with the abilities and background needed to insure the company’s success.

MARKETING IDEAS

Because they assume that a newly-acquired business will be subject to the problems of the current, declining economy, lenders need to be convinced the buyer has a plan to boost sales and earnings, and will not just continue the business as it was operated in the past. The business plan should include a heavy focus on marketing strategies (link to BizBen Article on Marketing Plan), including ways the new owner will attract new customers for current products and services, and will create profitable new ways to service existing customers.

Prospective small business buyers who require borrowed funds to make a purchase need not be discouraged by the tougher SBA requirements and a more challenging economy. But, says Siegel, you will need to demonstrate the characteristics of a good entrepreneur--diligence, persistent effort and creativity-- to get the needed funds.