Creative SBA Financing

by Scott Ramsey on February 18, 2009

SBA has published some changes to its SOP effective March 1, 2009 limiting the amount of goodwill financing in 7(a) transactions to a maximum of $250,000. The examples below show what an alternative allocation of the purchase price of a business might do to deal with these changes:

Total purchase price $1,000,000 allocated as follows:

Allocation One

Inventory $3,000, FF&E $22,000, Goodwill  $975,000

Allocation Two

Inventory $3,000, FF&E $22,000, Goodwill $250,000, Non Compete Covenant $300,000, Customer Base $275,000, Trade name $75,000, Policies/Procedures $75,000

The key difference between these two scenarios is that the second allocation would presumably allow for a full SBA loan for the required $800K (80% of the purchase price) including $250K allocated to “goodwill” where the first scenario would only allow an SBA loan of $275,000.

Food for thought in the event that these changes do take place March 1.