No doubt our readers have been following the latest legislation regarding the CARES Act. There are a lot of things to keep up on. As business owners, we trust you are getting details from your CPAs on the tax treatment of PPP loans, employee retention credits, meal deductions, etc. Additionally, huge incentives are coming through the Small Business Administration.
SBA lending is popular and effective for one reason: TERMS. In most cases, an SBA loan will beat out any interest rate and loan period when compared to traditional lending. And lenders are willing to go along with these terms because of the SBA Guarantee, which states that in the event of borrower default the SBA will guarantee to that lender up to [historically] 75% of the loan. This program, however, has been made possible by means of a little fee called the SBA Guarantee Fee. The Guarantee Fee has historically been 2%, and is paid for by the borrower.
Three big changes are coming with this latest CARES Act legislation:
- The SBA Guarantee fee is waived! That’s right. Now borrowers can save 2% off of the total transaction cost of the deal. For the average deal, this is tens of thousands of dollars in savings; this will lower invested capital and increase returns for buyers. Sellers offering seller-financing will also benefit by a decrease in the amount of a note to be held, as usually the percent of seller financing is a function of the total transaction price (which is now reduced).
- The SBA Loan Guarantee is increased to 90%! This change lowers borrower qualifications and invested capital thresholds. SBA will now guarantee up to 90% of the loan to a lender. This will give lenders more confidence in making loans and will reduce the amount of invested capital required to close. This change not only helps SBA transactions, but this should increase lending power of banks across the market. Capital should be more readily available throughout the system for working capital, capital equipment, real estate and other capital-intensive growth initiatives.
- Loan payments will be paid by the SBA! Ladies and gentlemen, this is not a deferral. The principal and interest you owe to your lender will actually be paid by the SBA to your lender on your behalf. That’s right. When a business transaction closes between now and September 30, 2021, the SBA will actually pay the first six months of principal and interest on that loan. This incentive was available last year, but closed at the end of 3rd Quarter 2020. With the new legislation this incentive is back and buyers that are considering SBA financing need to work to get loans closed by mid-September.
All other things being equal, Buyers and Sellers of businesses should expect a good transaction market in 2021. Capital just became cheaper and many businesses have proven themselves to be pandemic proof on account of demand inelasticity or even antifragility. We continue to be amazed by and proud of the number of businesses that actually achieved “a best year ever” in 2020.
If you are considering a sale this year, close out your 2020 books as soon as possible. To a buyer, proof of strong 2020 financial performance will be the most important indicator of business viability. Ask your CPA to be on the list of ‘on-time filers’, rather than file with an extension. Discuss with your CPA. And, please, call GAI to schedule a valuation consultation.