By Ted Lauer, Access National Bank
As the flow of financing to “small” businesses has slowed, the federal government has responded within the new Jobs Bill, effective 09/27/2010, to stimulate lending in numerous ways. The most direct benefits will be a loosening of the eligibility requirements and an increase of the credit enhancements within the U.S. Small Business Administration’s (SBA) “7a” loan guaranty program.
Within the 7a program, lenders extend credit directly to borrowers for almost any reasonable purpose that assists the small business. These loans are most often term loans, but in some cases can be multi-tranche packages with revolving facilities. If the requirements for support of the “owners” (i.e., any person or entity owning 20% or more) can be accepted, the remaining financing terms are exceedingly favorable to the borrower. These requirements upon the owners include, guarantees, pledging collateral if such is available, and guarantees from affiliates.
Given these requirements, PEGs will more likely see 7a usage as a means to sell a portfolio company, rather than using the program to acquire companies.
For adequately capitalized borrowers with proven management and demonstrated cash flow, a lack of collateral is not an impediment to loan approval.
Some key features of the 7a program, with “stimulus” improvements in parentheses, are:
Maximum loan size: $5,000,000 (was $2,000,000 prior to Jobs Bill)
Maximum project size: No limit
“Small” definition: $15,000,000 net worth; $5,000,000 two year average profit (was primarily NAICS revenue driven before Jobs Bill)
Loan guaranty %: 90%, through 12/31/10 (was 75% prior to Jobs bill)
SBA guaranty fee: $0, through 12/31/10 (was up to 3.75%)
Bank fee: $0
Loan term: Up to 10 years, fully amortizing; 25 on owner-user real estate
Eligible uses: Business acquisitions, re-financing, partner buy-out, above-the-borrowing-base working capital fixed asset acquisition
Profile of pending loan applicant: Refinancing
A borrower with $30,000,000 revenue obtained an aggressive financing package in 2007 from a national bank. This package included an A/R Line plus term loan funding for a final payment on an ESOP purchase. The borrower subsequently failed to meet its financial covenants. In 2009, the borrower re-financed approximately half the debt into a A/R line, and the remainder into a warrant-less mezzanine debt facility with a 10% up-front fee and an interest rate of 15%, repaying over five years. The borrower will now obtain a SBA loan to refinance the mezzanine debt balance over 10 years at P+2.75% (6.0%), cutting interest expense and debt service by over 50%.
Profile of pending loan applicant: Partner buy-out
The company is majority owned by one party, minority owned by another. The minority party wants to buyout the partner without raising any equity or mezzanine debt to accomplish the transaction. The valuation of business is completed to document value of the minority owner’s current equity position as a basis of equity in the new transaction, and to support non-overpayment on the sale price. The borrower then obtains 100% financing on a 10-year term to buyout the majority partner. The majority partner is retained on a consulting basis for a term not exceeding 12 months.
Profile of pending loan applicant: Business acquisition
A consulting practice is being acquired. The principal of buyer has no cash equity to inject into the transaction, but a well established resume. The owner agrees to provdie seller-debt on “full standby.” Thus, no repayment is made to seller within first 24 months, creating the required equity position. After two years, the seller-debt will term out on reasonable terms.
Things to consider with SBA loans
When choosing a lender to provide the SBA loan, ask whether the loan officer on the SBA loan, and on the asset-based line, will be the same person. If not, consider the complications of processing financing through two loan officers in two different departments within a bank. Also, choose an SBA designated “preferred” as they can make the credit decision for SBA, thus without the delay and risk of SBA rendering a separate credit-approval decision.
Before a business owner pursues equity or subordinated debt financing, an SBA loan should be considered.