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.