Many convenience store retailers consider the Small Business Administration (SBA) as a cumbersome lender of last resort. However, in an attempt to shed that image, the SBA has made a number of changes.
Its flagship lending program, the SBA 7(a) loan, long known for its financial assistance to franchises, as well as an excellent way to establish a new business, has been streamlined and modified.
The SBA’s 7(a) program can be a desirable option when seeking to acquire a business. With an SBA loan, it is the bank that makes the loan, while the debt is partially guaranteed by the SBA. This allows the bank to provide credit for a borrower who might otherwise have difficulty obtaining a loan with similarly favorable terms. The SBA acts much like an insurance company, allowing the bank or financial institution to extend beyond its conventional credit reach.
In addition to the size of the business, a borrower must meet other SBA requirements, which include limits on net worth, average net income and overall loan size. There may also be extensive paperwork for the applicant that involves submitting details on accounts receivable, personal as well as business tax information, along with financial statements, both personal and business.
The average 7(a) loan amount was $425,000 in 2018, according to the SBA. The program’s maximum loan amount remains at $5 million. Under the old rules for acquisition loans, deals with more than $500,000 in goodwill required a 25% seller note or buyer equity. Deals with less than $500,000 in goodwill required 20% seller note/buyer equity.
Requirement Changes
Today, the SBA has slashed the 7(a) loan program’s equity injection requirements to 10%, enabling banks to finance up to 90% of the deal.
Of the 10% equity requirement, 5% must come in the form of cash from the buyer, while the balance can be in the form of a seller note. If the equity injection is through a seller’s note, the standby now extends through the life of the loan instead of the former two-year restriction.
A conventional business acquisition loan is usually based on a three- or five-year term. This can make it tough for the c-store business to meet the debt servicing requirements of most lenders. Using an SBA loan, the acquisition loan can be stretched out over seven or even 10 years. This means lower payments and makes it easier for the borrower to meet the debt service requirements of the lender.
Although the amount and type of financial information required under the SBA is the same information required with more conventional, non-SBA banking options, it does require numerous documents and can be tedious.
Options For Support
Thus, when considering an SBA loan, it is helpful to seek out a lender that is part of the SBA’s Preferred Lender Program (PLP).
After all, PLP lenders know how to determine eligibility, can properly structure the loan and collect all of the appropriate documents. PLP status allows the bank to approve the loan without waiting for the SBA’s approval.
SBA loan programs typically involved independent small businesses with franchisees considered an affiliate and ineligible for a loan. Today, however, franchisers can have their brand listed in FRANdata, a third-party registry, along with a pre-negotiated amendment to their agreement that makes them eligible for SBA financing.
Professional advice is still strongly recommended. But thanks to the SBA’s new rules and guidelines combined with a stronger economy, many c-store retailers who previously postponed acquisitions and expansions may now be poised to move ahead with acquisitions. The SBA’s 7(a) loan program may be an excellent tool for that growth, expansion or acquisition.
