Why is SBA tightening loan rules as economy slows?
"I do not understand the timing... These unemployed people will remain unable to purchase a business," complains a South Jersey business broker.
The Small Business Administration has tightened rules about lending money to buy small businesses whose price is a lot higher than the value of their buildings, inventories, and equipment.
"In no event may the amount of goodwill [price minus value] financed by an SBA loan exceed 50% of the loan amount," or $250,000, SBA financial assistance director Grady B. Hedgespeth wrote in a note to SBA workers Feb. 27. He added that lenders expect a flood of unemployed workers are going to be trying to buy businesses with taxpayer-guaranteed SBA funds as corporate layoffs surge.
"I do not understand the timing... These unemployed people will remain unable to purchase a business," says South Jersey-based business broker Rob Selby of Selby Associates. "In this economic crisis... the SBA is following the big banks and tightening lending," reducing potential small-business hires and tax payments.
"This is the unresolved hot-button issue in the SBA lending world right now," lawyer Ethan Smith at SBA-oriented law firm Starfield Smith PC in Fort Washington told me. A lot of deals "need to find other sources to fund the balance of the purchase price... Most sellers are unwilling."
David Dickson, district director of SBA in Philadelphia, defended goodwill as "a very viable part" of small businesses. "According to some business brokers I've talked to, this will have a definite negative impact on the transfer of businesses in the U.S., by as many as three-quarters." He added, "The policy is intended to limit the exposure fo the government." Still, "there's no statistics that say this is a problem."
Until the new rules came out, SBA "had almost no guidance about 'goodwill,' " SBA policy deputy Jim Hammersley told me. "We found out lenders were using the program to finance goodwill and, in some cases, erporting that as working capital. So we thought we'd put out specific guidance."
Hammersley agrees with Dickson that SBA doesn't have data showing whether goodwill loans are actually more likely to blow up, leaving taxpayers to pay the loss. "We're going to find out," Hammersley concluded. Borrowers can appeal -- an onerous process, says Selby -- but nobody's likely to change the policy at least until SBA's next director is confirmed by the Senate. Obama has nominated Maine venture capitalist Karen Gordon Mills for the job.