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More on the Basics and Updates on SBA Loans

As Business Brokers, we have received a LOT of questions about funding and loans for business acquisitions. The other day, we offered a brief comment on such issues in the BizBuySell Community, and were hit with so many private questions and comments that we decided to provide more detail, based on those questions. This information is provided in the next comment, below.

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Answers (15)
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The BAF Group LLC
MD

Information suggested by this "lender" (below) is incorrect. It is then suggested that you should not deal with them.

Sep 18, 2017
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Signing with this lender (below)? BAD idea!

Sep 17, 2017
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Signing with this lender (below)? BAD idea!

Sep 17, 2017
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ANGEL LOAN COMPANY
LOAN OFFER
Alachua County, FL

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Best Regards
Steven Goodman

Sep 17, 2017
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Beware of supposed lenders like those, below !

Sep 17, 2017
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HELLO EVERYONE, I AM MRS. VERONICA FERNADEZ AND I WILL APPRECIATE YOU IF YOU DO NOT MISS OUT OF THIS 3% LOAN TRANSACTION OF ANY AMOUNT.

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Angel.investment.uk@gmail.com
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Sep 17, 2017
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The BAF Group LLC
MD

Do not pay attention to the last writer!

Nov 29, 2016
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The BAF Group LLC
MD

Nor would I deal with Larry Buknor or Kate Roman

Nov 28, 2016
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The BAF Group LLC
MD

I certainly would not deal with Diamond Rosa!

Nov 15, 2016
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The BAF Group LLC
MD

Gary, you are an illiterate

Nov 13, 2016
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The BAF Group LLC
MD

Daniel, thanks for the question. We have not gotten any direct feedback on the SBA 7(a) patriot express loan. Prior to the market eroding for business sales in the Spring of 2008, we had actually done about 80% of our work through SBA loans. But when the market faltered, we moved into larger acquisitions and used the private funding arena; for the few small businesses we continued to do, we predominately employed Seller Financing; for bigger deals, we were able to tap into some sources of investors, either through the Buyer's own resources or a couple of our own.

So, in effect, we got away from SBA-based loans altogether. The Banks AND the SBA seemed to be in disarray, the SBA seemed to be changing its rules on an hourly basis, and because we did not have the real need at that time, we just ignored the situation.

Now, the market is changing yet again. For the better! Because we have increasing requests from both Buyers and Sellers, we began to work to understand the changes, which brought us to the two postings we provided here. We are now beginning to get back into the thick of SBA lending, once again. Or trying to!

It has always been a very successful venue for us, and we were extremely disappointed when the programs seemed to falter. We never had the mammoth delays and nightmarish problems with SBA loans that you hear about from others, and we hope that will not be the case now.

As for the Banks wanting zero risk, you are probably correct. The old cliche seems to be more true than ever: "You need to prove to the Bank that you don't need them, in order for them to offer you anything in the way of a loan!"

Oct 14, 2009
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hi Don, do you have any experience with the SBA 7a patriot express loans? It looks like it may be one of the best options. Also, if SBA guarantees 75% does that mean someone has to put down 25% for the bank to have zero risk?

Oct 14, 2009
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The BAF Group LLC
MD

Phil, I am uncertain about that. There is no question that there was a reluctance for Banks to begin lending again - I had considerable difficulty with some lenders, myself. And make no mistake: The lending that is going on is more difficult to come by. But I believe part of the prior problems were with the Banks themselves just frozen for a while, trying to figure out what the heck was going on! One Bank we tried to deal with admitted back in February that it was actively accepting applications, but they were not lending anything; they were not even running the applications through their own processes! I think that is the biggest problem you probably have seen. The Brokers had that kind of experience back in the winter, and frankly just gave up!

Some of the less practiced Brokers simply don't know how to deal with loans. They didn't when times were good, and they don't know any better, now. They are the ones that usually get a contract, and then tell the Buyer to come back when he has a loan. Those Brokers don't have any regular communication with Banks, so they have no idea of the current state of the funding marketplace.

Oct 12, 2009
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Thanks Don. So statements we are hearing such as "there is simply zero bank lending right now for small business purchases" is simply false? These statements are coming from brokers who desire to get businesses sold, so why would they say such things?

Oct 12, 2009
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The BAF Group LLC
MD

Our effort to clarify the issues surrounding the current state of eligibility for SBA loans was through contact with our Wells Fargo/Wachovia representatives, in Maryland. Our primary contact has been with Wells Fargo SBA for more than 15 years. WE ARE NOT ENDORSING, WE ARE NOT PROMOTING, NOR ARE WE PAID BY WELLS FARGO/WACHOVIA! We a have had a successful relationship with Wachovia for years and simply have a relationship with that Bank that allows us easier communication than with other Banks with which we have also had successful, but less frequent dealings. That said, this is a summary of some of our conversation with our contact.

Buyers of businesses in this "Community" would probably best benefit for purchasing their businesses through loans from either SBA 7(a) or SBA 504 process. This is certainly not the only way to go; but as a rule, these would seem to be the most beneficial loan programs for small businesses.

If the loan amount is under $2,000,000 and all of the underwriting requirements can be met, in many cases it can be faster and easier to use the SBA 7(a) loan program than to use its sister program, the SBA 504. The SBA 504 loan program is a great program for financing transactions that, for one reason or another, may not fit well within the SBA 7(a) loan program. It is used for financing larger transactions (over $2,000,000) that contain large amounts of fixed assets, predominately Real Estate. However, since the SBA 504 loan is composed of two loans, it must be underwritten by a CDC as well as Wells Fargo, which could add to the overall processing time of the loan.
In most cases, Banks require that a borrower put 10% down for Real Estate loans and 15% down for Business Acquisition loans. There are circumstances - and we have done this with some frequency - where the Seller may need to offer a secondary note, in order to make the deal more palatable, or in today's market, to offset the amount of Good Will that is involved in the pricing.

Not all businesses can be financed through the SBA. A complete list of these may be found on the SBA's website at www.sba.gov. Businesses that are not eligible include, but are not limited to, non-profit organizations, publicly-held companies and businesses that are too large to meet the SBA's small business size standards. Other types of loans are ineligible under the SBA loan programs include loans for businesses engaged in ineligible activities (such as a gentleman's club), loans for investment real estate (such as a retail strip center), loans for businesses whose revenue is primarily passive income (such as a business where revenue is derived from renting or leasing the premises to others) and loans for residential properties (any type).

There has been some comment about the fact that there are no longer any SBA Preferred Lender (PLP) arrangements with any Banks; I don't know where this came from, but I have spoken to three PLPs, none of which are aware of any change that has affected their positions with SBA.

There are other issues about SBA that are new and changing. Earlier in the year, Goodwill was capped at $250,000. That cap has been raised to $500,000, and if Goodwill exceeds that amount, the business may still be allowed to be financed in an SBA loan, provided the Borrower Injection (down payment) is 25% or greater.

Finally, I asked my contact about how long it takes for routine SBA loans to be processed in the current credit environment. His answer should only be viewed as pertaining to Wells Fargo's own experiences, and not a guarantee of any kind. Typically, everything is measured from the time ALL documents are provided, so it depends on the Buyer, the Buyer's Accountant and the Business Broker involved as to how complete the application package might be, when it arrives at the Bank.
On the time element involved in getting an SBA loan, the Wells Fargo contact replied: ". once we have a few key pieces of information about the borrower and the subject business, a loan request can usually be prequalified in 24 - 48 hours and a Loan Proposal issued. Once a Loan Proposal has been signed by the borrower and a complete Loan Application Package has been submitted to Wells Fargo SBA Underwriting, a final credit decision can usually be provided within 7 - 10 business days. Once a loan has been approved and a Commitment Letter has been issued to and signed by the borrower, it typically takes about 30 days to close and fund the loan. Larger loans and SBA 504 loans may take longer to process, depending upon the complexity of the transaction."

Our experience with Wachovia was usually a 45-day turn-around. So this fits in neatly to what our experience had been, earlier.

We hope this helps. If there are comments made here that are unclear, we would welcome your questions.

Oct 12, 2009