December 18, 2019
By Caity Witucki
Contributing Editor, Coleman’s SBA Compliance Report
Coleman’s SBA Compliance Report – Avoid Guaranty Errors with Business Acquisition Loans
On November 1, 2019, the SBA released a weekly lending report. The report showed 504 and 7(a) change of ownership lending activity was up from the previous year with 561 change of ownership loans in FY 2020 to date (a 7.2% increase from the previous year). Additionally, the amount of 7(a) and 504 loan funds was up from $449,826,300 the previous year to $501,604,700 (a 10.8% increase).
Business acquisition occurs when there is a change of ownership through a stock purchase or an asset purchase. For an SBA guaranteed loan, the non-owner or existing partial owner must purchase 100% of the ownership interest in the business.
The Top 5 Change of Ownership Requirements You Should Be Aware Of:
- The seller cannot remain as an officer, director or key employee. However, they can be retained on a short term basis as a consultant (12 months or less). If the purchaser is an ESOP, the seller can remain an owner, officer, or stockholder. However, if they remain an owner, officer, or stockholder; they must provide a guaranty on the loan.
- SBA Loans for business acquisition cannot be made solely to an individual. They must be made jointly to the small business and the individual. Therefore, the business and the individual must be co-borrowers in the transaction.
- 4506 Ts and Transcript must be collected on the Selling Business, Individuals involved in Ownership, and any new business entity. Additionally, the SBA lender will need to document a current business valuation, conduct a site visit, obtain a real estate appraisal (if CRE is being acquired), conduct an analysis of how the change of ownership will promote sound development of the business, document stocks, obtain a copy of the standby agreement, and include proof of the equity injection in the loan file.
- If CRE is acquired in a separate non-SBA loan, the SBA loan must have a shared collateral position in the CRE.
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