There may be a big incentive for prospective business buyers to accelerate their plans to buy a business if they are planning to take advantage of the SBA’s flagship 7a loan program.
As part of the $2.2 trillion CARES Act signed into law by President Trump on March 27th the SBA is paying six months of payments on existing SBA loans, including both principal and interest. This six months of payment under the 7a loan program applies for existing SBA loans and new SBA loans closed before September 27th, 2020. Important to understand, these are not deferments, but rather payments of principal and interest paid by the Small Business Administration. And if an existing SBA loan is on deferment, then the SBA payments will commence with the next payment due after the deferment period for the following six months.
Since the CARES Act became law, we have seen a spike in new users to our business acquisition lending platform. Our lending partners have given us a list of special considerations taken into account while making a credit decision and issuing a loan term sheet:
- This is not the time for marginal buyers to be in the business acquisition game. We are looking for buyers with strong personal financial positions so they can rebuild sales and pay down debt in a post-Coronavirus economy.
- Although the SBA is making six months of payments for newly originated loans, we cannot add back the payments into cash flow. Upon loan closing, the business cash flow will need to support the SBA loan payment plus any owner benefits required, such as salary.
- The impact of Coronavirus will most definitely be taken into consideration in the valuation of the business, but there must be a business plan to lay out a path to recovery of cash flow.
According to a senior manager of one SBA lender, “The SBA is able to easily calculate the cost of paying six months of loan payments on the books. They added about 15 to 20% to this number to account for new loan originations. This is a way the SBA can stimulate the economy with a relatively low overall cost.”
Dr. Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases, did give an indication that the economy could begin the process of returning to normal in the relatively near future. This is very good news for small businesses. While turning the economy on is not like a light switch and it is not going to be a one-size-fits-all solution, there is hope that at least in some ways we may start ‘getting back to business’ possibly by May.
The Governors of Western Coast and Northeastern states, along with the Trump administration, are making plans to reopen the economy. Plans may include letting the younger population and those that have recovered from the Coronavirus back into the workforce so that all of us benefit from an increase in economic activity. This plan would also protect the older and more vulnerable members of our society by allowing them to isolate longer and continue to provide critical products and services.
SBA lenders, the stock market, large corporations, and small business owners 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 the small business economy moving.” One SBA insider put it quite bluntly, “The size of this stimulus package shows how much money the federal government can inject into our economy when needed. The SBA and its 7a loan program are just one beneficiary.”
For potential buyers, here is a conservative timeline they may wish to keep in mind to take advantage of the stimulus built into the CARES Act for the SBA 7a business acquisition loan:
We’ve gathered some additional comments and observations from our clients, partners, and industry experts. Here is a list of some of those considerations:
- This is a temporary economic incident. There is no underlying economic weakness. Plenty of liquidity exists in the finance and banking sectors.
- Interest rates are at an all-time low and are not likely to increase soon. It took several years for the Federal Reserve to increase rates after the 2008 recession. As of April 14th, the maximum interest rate for a 10-year SBA 7a business acquisition loan is 6%.
- Not all businesses are equally affected by the Coronavirus. Businesses related to critical industries, manufacturing, food processing, online services, third-party logistics, delivery, warehousing, information related, at-home workforces are less affected than, say, restaurants, hair salons, and other retail businesses where consumers have to enter a physical location.
- A lot of small businesses will benefit from pent up demand. How many of us could use a good haircut, steak dinner, and a movie about now?
- Strong buyers will be taking advantage of the incentives offered by the SBA in addition to the already low-interest rates.
- The businesses that were overpriced will probably come down to an appropriate level.
- Small Businesses will notice a slight decrease in wages as workers reposition in the economy.
- As interest rates were increasing over the last several years, many business buyers asked: ‘what would happen were there to be a recession?’ The SBA will go to great lengths to make sure that small businesses don’t fail. The payment relief portion of the CARES Act for people with current SBA Loans is evidence of this. We are now seeing the SBA in action as it saves our small businesses.
Several of our clients feel this is exactly the right time to buy a business. They feel good about the way the federal government, the SBA and banks have, overall, handled this unprecedented event. It may be just the right time to get the right price on business as some owners may wish to sell while they think the lending environment is favorable to all parties.