There are two sets of rules in every SBA financed deal. SBA rules and the Lender Rules. Lenders will not tell you there may be other options in making SBA loans. If your deal does not fit their box, they pass the loan if they can not talk you into making changes to fit their box. So here are a couple of new SBA rules in 2018 and how they apply as far as SBA is concerned.
For a seller note to count as part of the buyer's equity injection, the seller carried note must be on standby for the entire term of the loan.
But, as long as the buyer makes the minimum down payment, we can still write a seller carried note subordinate to the SBA loan and collect payments on the note monthly subject to SBA lender approval...it just won't count as part of the down payment equity requirement. A sometimes workable tactic is to create a Forgivable Note.
Mind you the business still has to value out with SBA at the Sale Price stated in the contract.
The heart of a forgivable note might read as follows based on payout performance at specific benchmark dates:
EXAMPLE: The unpaid principal and accrued interest shall be payable in full on April 29, 2030 (the "Due Date")
EXAMPLE ONLY IN THE CORE OF THE NOTE YOU MAY CREATE CERTIFIED PERFORMANCE REVIEW DATES: These note payments will be forgiven using the following calculations: No reduction will be in years 3 and 4 (from the close date) of this note. Should gross revenue drop below that of the prior year for the first 2 years of this note the following reduction will take effect. Year 1 - If revenue (based on total gross revenues as reported on a pro-rate basis) decline during the first 12 months this not will be forgiven by the same amount the revenues have declined. Year 2 - If revenues (based on total gross revenues as reported on a CTR) decline during the second 12 months (based on first year gross revenues) this note will be forgiven by the one half of the amount the revenues have declined. The offset will be realized in year 3.
New Rule 2018: Complete Change of Ownership
Resulting in a new owner (complete change of ownership), SBA requires an equity injection of not less than 10 percent of total project costs. Seller debt may not be used to meet this requirement unless it is on full standby for the life of the SBA loan.
10% Of The Total Project Cost is:
- Selling Price +
- Working Capital +
- Closing Costs
Total above x 10% is then the minimum down payment.
The down payment can be gifted from immediate family member (mom and dad) with gift letter.
OR bring in a friend as minority owner (under 20%). The minority owner does not have to guarantee the loan.
There are two sets of rules in every transaction:
SBA rules which we have to abide by and Lender Rules of the particular bank. Lenders can make up anything they want.
Lenders are not going to let you know there are other options. They will only tell you what their boxes are and whether your deal fits their boxes.
When Real Estate is involved in part of the sale
If 51% or more of loan amount is real estate the loan can be 25 year amortization. It sometimes pays to run the scenario both with and without real estate and compare.
The easiest SBA deal we ever made was to a group of medical providers in dentistry. The lender bent over backwards. The reputations and career level of the borrower makes a huge difference sometimes in how a loan is processed by the bank.