You hear about them all the time. My buyer secured an SBA loan and my seller walked away with all the money. Does that still happen in 2013? The answer may be right in front of you, and it may happen a lot more than you think.
So, what is the trick to have a buyer apply for, get approved, and close an SBA loan? The short answer: it is all in the details. Once you have a signed offer, it then starts with correctly structuring the deal up front to fit into a lender’s specific box. With the onset of new lenders entering the market in 2011, 2012, and 2013, they each have specific knowledge of certain industries.
What we have found to be the most important factor in securing any loan is making sure we find and present it to the correct lender. What we typically see in the industry is that every lender promises to be great at every acquisition. What we actually see in the industry is that every lender is not. Depending on the BDO (Business Development Officer), the underwriter and/or their head of credit each have their own idea of what fits their criteria and what does not. Knowing exactly what types of businesses each lender likes and does not is key to saving time and frustration. As we all know, time kills deals. Spending three to four weeks with a lender only to find out that they are not going to approve the loan is devastating to your transaction.
Questions a Broker Should Ask a Proposed SBA Lender
Here is a short list of questions a business broker should ask when discussing financing with a proposed SBA lender:
What is the maximum amount of goodwill you can include in your loans?
Goodwill amounts are a moving target in today’s market. For the longest time there have been few lenders willing to extend themselves past $1.2 million in goodwill. That number is changing on a daily basis as lender competition grows. We have witnessed many loans with upwards of $2 million in goodwill approved and closed, and we see that number rising continuously. Stay current on this topic and request updates on this change from every lender you have a relationship with.
Do you have a minimum amount of collateral required for this loan? If yes, what percentage of the loan must be collateralized?
With goodwill components of loans moving upward, we see the collateral positions moving downward. We also see lender requirements range anywhere from 0% to 100% collateralization, depending upon the lender’s credit policies, so be sure you understand the criteria of the lender you are working with. If the lender requires 50% or more collateralization, you should expect that there are more aggressive lenders out there that you should be exploring.
How many loans for this industry have you done?
It is important to determine whether this is the very first car wash (or whatever industry) loan this BDO has ever underwritten, or the hundredth. If it is, then you can feel confident that this BDO knows the ins-and-outs of the particular industry. If it’s the BDO’s first, you may have an uphill battle on your hands.
How fast can you screen the deal with your credit department for a green light?
Most BDO’s actively writing SBA 7(a) loans should be able to have a good idea of whether or not a deal will be approved within a matter of days, if not hours. If it takes longer than that, understand why. Do not fall victim to the term sheet or proposal letter that may fall short in underwriting. Often, a lender will get a proposal or term sheet out to the buyer quickly, without underwriter involvement. Ask the BDO whether the actual underwriter has seen the loan application or taken part in development of the term sheet.
What are the most important factors in a potential buyer?
Understanding what type of buyer credentials a specific lender requires should not be difficult, as criteria such as minimum credit score, collateral and resumé issues are addressed frequently. Each BDO should know what his institution will and will not consider, and you should have this information also before presenting deals. In the current environment, many lenders are really drilling down on resumé and direct industry experience. You should be addressing this upfront and preparing your buyer to produce a more detailed transition plan upon request.
Do you portfolio these loans or sell them?
It probably does not matter to you if a lender sells their loans, if they have a track record of aggressively securing approvals. You should be aware, however, if dealing with a smaller local bank that claims to write SBA loans for its own portfolio. With a lender that does NOT sell their loans, you can typically expect tighter credit criteria and possibly higher collateral requirements. If it is a local bank and you are unsure of its level of interest or commitment to the 7(a) product, call your local SBA office and ask for quarterly numbers. They are happy to provide you with the local market SBA volume numbers, and that will tell you if that bank is serious about acquisition loans.
Keys to Successful SBA Financing
With the number of lenders and BDO’s calling your office growing, keep this list handy and make notes on their answer to each question. Try to determine the level of experience that your local BDO has. If you find that you know more about SBA loans than the BDO does, do not allow him to work on your deal (or monitor them very closely). If the BDO is known in the acquisition market as the go-to person, you are most likely in good hands. Learn how to determine the correct lender for your transaction and be the hero in your deal.
Do some homework, know your lenders, qualify the buyers, and you can be successful in securing the financing you need to put a deal together. Deals are being submitted and funded by different lenders all over the country and there has never been a better time to be a broker! Now go make magic happen!