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The Small Company Administration (SBA) adopted a set of new regulations on January 1st, 2018, making it simpler for individuals to utilize SBA 7(a) loans to buy a business. The SBA amended its Standard Operating Procedures (SOPs), notably SOP 50 10 5(J), which lowers the amount of equity required for company acquisitions and makes it simpler for borrowers to get franchise financing.

What were the previous SBA 7(a) Business Acquisition Equity Requirements?

Previously, the SBA’s acquisition loan guidelines required transactions with moreover $500,000 in goodwill to have a 25 percent seller note/buyer equity ratio. Acquisitions involving less than $500,000 in goodwill, on the other hand, required a 20% seller note/buyer equity ratio to be authorized. To summarize, goodwill is an intangible asset that develops when someone buys a company for more than its physical assets, such as real estate or equipment. Brand value, customer connections, and staff relationships, as well as any patents, trademarks, and copyrights, are all examples of goodwill.

A buyer note is a kind of financial instrument given by a company’s buyer to the seller as part of the buyer’s acquisition financing. Buyer equity, on the other hand, is the monetary down payment that the buyer makes to the company.

Acquisition Requirements under SBA 7(a) Reduce the amount of money you need to invest in your business

The SBA has lowered buyer ownership requirements to only 10% as a consequence of its new policy. This implies that banks may give up to 90% of the money a buyer needs to buy a company. As a result, a qualifying borrower would only be required to furnish 10% of the loan amount in cash or in the form of a seller note. Five percent of the ten percent must come straight from the customer (in order to make sure they have some skin in the game.) The remaining 5%, on the other hand, may be deducted from the seller’s letter. Buyers may now get up to 95 percent of the financing they need to acquire a company by combining a seller note with an SBA 7(a) loan.

Borrowers will find it easier to get funding for franchises under the new rules

Franchisees may find it difficult to get SBA loans, particularly the SBA 7(a) loan, since the SBA often defines franchises as affiliates rather than separate small companies, excluding them from SBA eligibility. SBA loan-eligible franchises are now included on the SBA Franchise Directory, thanks to recent revisions to the SBA’s lending policy. An SBA Franchise Identifier Code may now be assigned to each franchise on the list. This makes it easier for lenders to determine the condition of any franchise on the list. To qualify for an SBA loan, a franchisee may be asked to sign an addendum, which is an extra component of the loan agreement.

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