Where banks fear to tread, the Small Business Administration (SBA) and other associated public and quasi-public agencies try to fill the void. They do this mostly by guaranteeing small business bank loans to minimize bank risks.
The good news is that the SBA and its sister agencies are setting records these days making loans. The bad news is that these are almost all loans to existing businesses for expansions, not to neophytes for new acquisitions or start-ups.
Timing is a problem with these loans – the whole process can take 3 to 4 months! This is fine for a business expansion loan, but it is a killer when you are trying to keep a buy/sell deal together.
The most useful purpose for these loans is that they can be used to take out seller notes from previous small business sales.
It’s not unusual for a seller note to be written with a ‘balloon payment’ provision to cash out the seller in 3-5 years. By this time, the new owner of the business has a track record that fits the public agency guaranty profile. There is usually time, at this point, to allow for the lengthy 90 to 120-day loan guaranty process.
Source : Glen Cooper, CBA, is a Certified Business Appraiser and is President of Maine Business Brokers