SBA delays limit on goodwill financing

“Note: This article is from the Orlando Business Journal – by Kent Hoover Washington Bureau Chief, but it is being reported in numerous publications. The SBA 7-A program is the key lending product to buying/selling a business worth less than $4 million. Onerous was not a strong enough term to describe the $250,000 Goodwill cap.”

The U.S. Small Business Administration delayed implementation of a new $250,000 limit on the amount of goodwill that can be financed by 7(a) loans in a business acquisition.

The new limit was scheduled to go into effect March 1, but the SBA responded to concerns raised by business brokers and lenders, who contended the rule would make it impossible to use government-guaranteed 7(a) loans to buy many businesses, particularly service businesses or professional practices.

Goodwill includes the intangible assets of a business that create cash flow, but do not have a book value. Hard assets such as real estate or equipment are not included in goodwill.

On Feb. 6, the SBA advised lenders that, in cases of business acquisitions, no more than 50 percent of a 7(a) loan should be used to finance goodwill. In no case should goodwill account for more than $250,000 of the loan amount, according to the SBA’s guidance.

Because of the uproar over this limit, the SBA decided late Feb. 27 not to implement it until at least Aug. 31. Until then, the agency will review requests to exceed the $250,000 goodwill limit on a case-by-case basis.

The agency will analyze the types of businesses and transaction structures submitted in these applications to decide what limits should be placed in the future. The SBA currently does not have data on the amount of goodwill financed by its past business acquisition loans.

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