04 Mar SBA relents on goodwill rule, for now
A few weeks ago, Agenda reader Roland wrote to say that just as Congress was bulking up Small Business Administration lending by passing the stimulus bill, “the SBA cut off the knees of the 7(a) program.”
The new SBA regulations taking effect March 1 limit the amount of goodwill that can be financed to $250,000. Almost all small businesses are service oriented and goodwill is a substantial portion of any SBA 7(a) loan. Heavy asset businesses with lots of machinery are top heavy with existing debt and usually do not produce cash flow (not good acquisition candidates). Plus, the banks will only value the hard assets at liquidation value as collateral anyway.
The result will be no SBA 7(a) lending to small business over $300,000 in value.
Though Roland was wrong about limiting lending to companies worth less than $300,000, he was right about everything else: the SBA intended to limit goodwill financing to 50 percent of the total loan, up to $250,000. “Goodwill is one of the riskiest assets that can be financed because it typically has no liquidation value,” an SBA spokesman explained last week. Prior to the new rule, he added, the agency’s Standard Operating Procedures said only “that sellers should finance the goodwill when they sold a business, but we found that SBA loans increasingly were being used to finance goodwill along with other real assets.”
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