Pending SBA Loan Policy

The number of Small Business Administration-approved loans is declining — so far this year, the number of loans is down 50% from this time last year. Many factors have contributed to this decline. Lenders say that high fees associated with SBA loans make them less profitable. And the practice of selling loans to a secondary market, freeing up capital to make new loans, froze last fall along with everything else.

In an effort to reverse this decline, Obama’s economic stimulus package tried to make SBA loans attractive again by reducing fees and increasing the government guarantee on 7(a) loans. However, recent SBA policy guidance regarding goodwill may thwart this effort.

Goodwill is the premium that a business buyer pays to a business owner for the business’ established market share, existing customer base, or premium location. Real estate and tangible assets, like machinery and equipment, are not considered part of goodwill. Under the SBA’s new policy, only 50% of a 7(a) loan can be used to finance goodwill, and that 50% may not be more than $250,000. The reason behind the SBA’s policy is that goodwill is a risky investment. In the event of a loan default and business liquidation, goodwill has no monetary value.

This policy will make it difficult for people to put SBA loans toward many business acquisitions, particularly those whose value is primarily derived from existing customers and name recognition. Because concerns have been raised about the ramifications of this change to its SOP, the SBA has agreed to review on a case-by-case basis loan requests that do not meet its policy, and may revise its policy in September of this year.

In the meantime, many banks and attorneys are taking a closer look at the value of a business’ tangible machinery and equipment assets, hoping that their value will offset the limitations placed on goodwill. The certified appraisers at Present Value can help determine the value of those assets. To order an appraisal, click here.

By: Present Value

Tags: Appraisals, Business Valuation, Machinery & Equipment, Machinery and equipment appraisal, SBA SOP changes

This entry was posted on Tuesday, April 21st, 2009 at 5:44 pm and is filed under Business Valuation, Machinery & Equipment, SBA SOP changes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.