SBA Introduces Partial Loan Payment Program for Business Buyers
As part of the $2.2 trillion CARES Act, the SBA is now offering to make six months of payments on SBA loans, including both principal and interest. This partial payment program is part of the SBA’s flagship 7a loan program and applies to both existing SBA loans as well as new SBA loans that are closed before September 27th, 2020. SBA lenders, the public stock market, and businesses of all sizes recognize that a significant disruption has occurred in their business activities. The SBA is paying six months of payments for current SBA borrowers to relieve stress on business owners and attempting to “keep our small business economy going.”
It is important to note that this is not a payment deferment plan, instead, the SBA will actually make payments of principal and interest for buyers.
If you are a potential buyer, it’s important to remember the following:
- This is a temporary economic incident. There is no fundamental economic weakness.
- There is lots of liquidity in the finance and banking sectors, this is not a repeat of the 2008 financial crisis.
- Interest rates are at an all-time low and are unlikely to go up soon. As of mid-April, the interest rate for a 10-year SBA 7a business acquisition loan was 6%.
- Businesses in essential industries, like food processing, distribution, manufacturing, online retail, third party logistics, delivery, warehousing, IT, and healthcare may actually see an improvement in overall financial results.
- Many small businesses will benefit from pent up demand.
- Businesses that were overpriced at the end of 2019 will be repriced to reflect current market conditions.
- Many small businesses will see a decrease in wage costs as the unemployment rate increase and workers look for new employment.
If you are interested in taking advantage of this program, keep in mind that deals must be closed by September 27, 2020 to qualify. So, working backward, you may want to keep the following timeline in mind:
- Sign letter of intent – May 15th
- Complete Buyer’s Due Diligence – June 1st
- Secure Lender’s Financing Proposal – June 15th
- Lender Submits Loan to Underwriting – June 30th
- Lender Underwriting Completed – July 31th
- Purchase Agreement Completed – August 28th
- Target Closing Date – September 1st
- Fall-back Closing Date – September 15th
- Drop Dead Closing Date – September 27th
Since the CARES Act became law, we have had several conversations with bankers and non-bank lenders. They believe this is a once in a lifetime opportunity for entrepreneurs who are thinking about buying a business. They have shared with us some of the insights they are getting from their credit committees and executives that are being taken into account when reviewing loan applications and making a credit decision before issuing a loan term sheet:
- Lenders realize now is not the time for inexperienced entrepreneurs to be buying a business. Lenders are looking to back buyers with strong operating track records, a solid personal balance sheet, and a clear vision about how they will be able to rebuild sales and pay down debt in a post-Coronavirus economy.
- Even though the SBA will be making the payments for the first six months on newly originated loans, lenders can not take that into the credit decision. To qualify for the program, the cash flow of the business needs to be able to support the loan payment without taking into account the SBA payments.
- Lenders are willing and able to take into account the impact the Coronavirus has had on the business when valuing a business, but buyers must have a clear and realistic plan to get cash flow back to pre-pandemic levels.
- Certain businesses, especially those that provide “essential services” are especially attractive candidates for this program right now, because they were not as severely impacted by the pandemic as other businesses.
For additional information about this unique SBA loan payment program, visit the BizBuySell Financing Resource Center or contact Richard Jackim at 224-513-5142 or at rjackim@jackimwoods.com.
