By Ted Lauer, Senior Vice President, Access National Bank
Effective January 1, 2018, the requirements to obtain an “7a” loan from a bank, backed by the guaranty of the U.S. Small Business Administration (SBA), to buy a business are changing.
As background, SBA does not make loans directly to businesses, it has a loss-sharing agreement with banks making 7a loans, and SBA collects a loan fee at settlement of each loan which goes into a reserve, which funds pay-outs to banks on 7a loan losses. The program operates at no cost to U.S. taxpayers. SBA backs eligible loan requests, which require the business be “small” (under $15,000,000 net worth and $5,000,000 average net profits), the loan to be for an eligible loan purpose (growth, refinancing, partner buy-out, ESOPs, etc…), in loan amounts up to $5,000,000.
Presently, the SBA has requirements that equity-injections be at 25% of the purchase price, or else the loans are subject to more cumbersome “CLP” approval processes where the bank losses control to SBA over the timing, and the loan approval decision. The new rule lets the bank have sole control over the loan decision and timing (“PLP” processing), subject to only a 10% equity injection requirement. Very few banks would presently approve a 7a loan without a 10% injection, so the net result is the end of the forcing of these loan approvals through the slow and uncertain CLP process. In summary, inject 10% of the purchase price and the bank can fast-track loans and have control over the approval decision. This 10% can also come from a Seller Note that gets no payments until the SBA loan is paid in full, especially useful for ESOPs, a growing exit-option in the Government Contracting community as the owners of the gov con business can set up an ESOP (Employee Stock Ownership Plan Trust, an ERISA Plan) and sell the business to this trust, putting 50% to 75% of the sale price in their pocket at closing, holding Seller Notes for the 25% to 50% difference (of which only 10% needs to be without payments until SBA loan is paid-off). For more information about ESOPs go to www.nceo.org.
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