There are some unexpected requirements for anyone taking out a business acquisition loan from an SBA-backed lender. It’s a good idea for the borrower to become familiar with some of the agency’s SOPs (Standard Operating Procedures), rather than be surprised when signing for the loan.
Among the SBA requirements are:
1. Appraisals: Not only will the lender offering to fund a business purchase under an SBA 7(a) loan program want an appraisal of the business being sold, it also will be interested in the value of any real estate or other collateral posted by the borrower to help secure the obligation. The report of an independent appraiser will be required for both.
2. Insurance: Hazard, marine, flood (if the business is in a flood hazard region), and life insurance on the principals if, in the words of the SOP: “viability of the business is tied to an individual or individuals…" will be required, with premium payments paid by the borrower. Also mandated by the SOPs, if applicable to the lender’s protection, might be coverage for liability, product liability, malpractice, disability and DRAM (host/liquor liability).
3. Leasehold interest: Premises leases need to be of sufficient duration, including renewal options, to match or exceed the loan term. This provision in the SBA SOPS is applicable if the company’s leasehold improvements, equipment, fixtures and/or machinery are purchased with the loan proceeds or are used to secure the business acquisition loan. There also may be a requirement that the landlord provide a waiver, giving the lender the right, in the event of loan default, to access the premises and to liquidate any personal property securing the loan.
4. Franchise rights: Before loaning funds for purchase of a franchise, lenders usually will require written confirmation of the right to inspect the books of a franchisor, in order to review the business operation records of a franchisee who is in default of an SBA-backed loan. A related right is for the lender to require, in the case of a franchisee behind in his payments, that fees or royalties owed to the franchisor be deferred until the loan payments are brought current.
5. Child support: Any borrower receiving at least 50% of the proceeds of an SBA-backed loan is required to certify that he or she is not behind in child support payments. That’s not an SBA SOP that will apply to most borrowers. But the business buyer responsible for child support, and who is depending on an SBA-backed lender for purchase funds, had better make sure those payments for the kids are up to date.
These and other provisions detailed in the SBA’s Standard Operating Procedures are designed to protect every lender who makes a business acquisition loan guaranteed by the federal small business agency. A borrower should become familiar with the fine print so there are no surprises when the loan agreement is signed.
About The Author: For over 25 years Peter Siegel, MBA has provided niche business purchase financial advisory and loan broker services with SBA Loans, Non-SBA Loans, Retirement Plan Conversions, Hard Money, Gap/Bridge Financing, Note Restructures, etc. He assists with financing for: Business Purchases, Business With Real Estate Purchases, Franchise Resale Purchases, New Franchise Purchases, Pay Off Existing Seller Notes, Partner Buyouts, Employee Buyouts. Peter Siegel can be reached direct toll free at 888-983-1632 regarding getting professionally pre-qualified, advisory & loan placement services.