IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following content has been provided by Jason Gill of First Federal ( www.ourfirstfed.com):
SBA Loans for Acquisition or Expansion Post Pandemic
With COVID-19 vaccinations restoring some semblance of normalcy, many businesses are gearing up for higher revenues and increasing staffing. Other businesses are looking to acquire competitors that may not have pivoted as well as the acquirer. Banks that are using conventional loan structures appear to be all at different levels of appetite for expansion capital, some are clearly hesitant. SBA Lending though is at unprecedented levels mainly because the Economic Recovery Act expanded the bank guarantee percentage on SBA 7a loans from 75% to 90% and waived virtually all of the fees on both SBA 7a and 504 loans. This article explores why SBA loans are particularly advantageous in the post pandemic world and provides some specific requests we have had at First Fed to highlight the advantages.
Bank Underwriting vs. SBA Underwriting
Bank underwriting typically focuses on the last 3 years of operations, captures the cash flow on an average basis, and then tabulates whether or not the historical cash flow can service the requested debt, either for expansion, new equipment, or acquisitions. The problem with this approach in 2021 is what to do with the financial results for 2020. Is the bank underwriting to pre-pandemic cash flow, or is the bank underwriting the past 3 years of cash flow inclusive of 2020 results, and then trying to eliminate any extraordinary items? Guidance is not very clear from the regulators and each bank has taken their own unique stance on how to underwrite 2021 loan requests. During times of uncertainty, banks, at least when lending monies that are 100% their risk, will tend to gravitate toward more conservative underwriting, making any new loan requests harder to get approved.
SBA lending clearly states that projections can be used to support the loan request. The projections do need reasonable assumptions and any increases in revenues need to be supported by contracts, new purchase orders, or a recent uptick in business at a service provider. More importantly, the SBA can not decline a loan for lack of collateral, though the SBA will take all available collateral including a junior lien of any guarantor’s primary residence and assignment of life insurance. Loans for the following purposes are no longer loans that banks shy away from and are now loans that can now be approved:
- Acquisition loans with a large portion of the value of the business being ongoing cash flow or goodwill (commonly described as asset light loans)
- Loans to expand businesses where the assets being purchased would have little value to a bank in liquidation (restaurant equipment, medical mergers, retailers, wellness brands, law offices)
- Loans where a turnaround is in effect, either from opening post pandemic, or a change in management or the direction of the business
Economic Aid Act Provisions
The Economic Aid Act passed in December 2020 allows for a number of enhancements to both the SBA 7a and 504 programs through September 30, 2021. The first provision is to increase the government guaranty on SBA 7a loans from 75% to 90%. It’s simply human nature for credit officers at banks to be more willing to stretch to get a loan approved when 90 percent of the principal balance is guaranteed by the government. In addition, a number of the fees paid by banks, borrowers, and Certified Development Companies (CDCs, typically conduits to the SBA for 504 programs) are waived through September 30. Rates are near all-time historic lows.
Allowed Uses of Funds
The SBA is in place to try to give small businesses a more level playing field when getting access to capital. The SBA also wants to encourage job creation, acquisitions and expansion capital are encouraged, refinances, though possible, are generally discouraged. Here are some examples of requests I have had here at First Fed that have either been funded or are highly likely to be funded:
SBA 504 requests
An engineered wood floor manufacturer and distributor is purchasing a new company
headquarters after its 10 year lease runs out, reducing its payment and building equity.
A wellness, lifestyle brand has similarly bought its new company headquarters.
A distribution company seeks to move its headquarters from Seattle to Edmonds.
SBA 7a requests
A family, who previously ran a restaurant, is acquiring a restaurant in its local community.
A boat building company is rapidly expanding at its new facilities and has requested term debt for growth.
If you have questions relating to the content of this article, obtaining a Small Business Administration Backed Loan, or the services provided by First Federal, Jason Gill would welcome the opportunity to talk with you. Mr. Gill can be reached at (206) 719-3489 or Jason.Gill@ourfirstfed.com.
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