Borrowing for Small Business
We do a lot of work with one, particular national Bank, in terms of Small Business Administration (SBA) Loans and referrals for people just starting out in Business. I had a meeting with the head of that Bank's SBA interface department yesterday, and the findings were alarming for anyone that relies on banks for Business borrowing, in general - not just SBA issues. This will affect both people who are buying/selling Businesses, as well as people that need to take out periodic loans for inventory, to get through seasonal cycles, even to borrow money to pay Taxes.
First, in buying/selling a business, it appears that the SBA is changing its lending practices, considerably. This is not new information; it has been anticipated for some time. The new changes were to have taken place in June, but have been delayed in August. The delay, in part I believe, is that they have not gotten the exact parameters for the changes laid out in stone, as yet.
Part of the change will apparently be in restricting the kinds of Businesses the SBA will support. The riskier the kind of Business, in the view of the SBA, the less chance it will back up the loan. This leaves it to the Bank itself to do the loan, it they care to make such a loan without SBA support, and Banks are notorious for not taking risk on their own.
For those of you who do not know what the SBA does, suffice it to say that it does not loan money, itself. It provides insurance, for lack of a getter term, to Banks which make the loans for Business purposes. These kinds of changes are common at various times in economic cycles, but this series of changes are more critical than most and will definitely hurt Business Owners that are thinking of retiring, any time soon.
Perhaps the most serious blow is that the SBA appears to be taking the position that it will not lend money as completely as it did in the past; it will rely on the Business Owner who is selling his/her Business to take a secondary note. Though the changes are not set as yet, as stated above, it is possible that the SBA will not lend on anything paid by the Buyer for Goodwill, or that it will lower the amount of Goodwill the SBA will guarantee. This will force the Business Seller to take at least part of the risk on financing.
Second, it appears that Bank of America and Citibank have both reined in their Lines of Credit, not only for Home Equity, but for some Business Lines of Credit, as well. (Remember that I have heard this from highly placed representatives in another Bank, but have not confirmed this with either of the two Banks named.) The Home Equity Loans affect a tremendous number of Small Businesses, because the Businesses themselves often do not have sufficient equity to provide security for Lines of Credit, on their own. Therefore, the Business Owner traditionally takes out a Home Equity Loan, or a Business Loan secured by his/her home, to secure the Line of Credit.
The reason these Banks have taken this action is largely due to the residential housing slump. If your Line of Credit was based on the value of your home - let's say your home was worth $300,000 when you initially set up the Line of Credit - it may be worth only about $240,000 in today's market, as far as the Bank in concerned. Therefore, there is far less security for the Bank, and so the Bank will refuse to lend on that basis.
Many Business Owners were not formally informed of this, and wrote checks from their Line of Credit accounts to the IRS to pay for their 2007 Taxes, only to find that the checks bounced! The Banks have not yet called in the loans, meaning they are not demanding immediate payment, but they are not honoring any withdrawals or extensions of credit, on this basis.
If you are one of the many Business Owners that has a Line of Credit, I would be extremely careful in calling my Bank, before writing any checks out of that account. Moreover, if you have already taken money out of that Line of Credit account, I would talk the situation over with your accountant. You may not want to pay that money back, any time soon. Pay the monthly interest or minimum payment, to be sure; but if you repay that money back in total, will you be able to rely on that account when you need it again?
Times are tough! As Small Business Owners, we can survive, and maybe even be stronger, as a result. (My philosophy is that crises breed opportunity!) But in order to survive, we have to anticipate and think ahead!
First, in buying/selling a business, it appears that the SBA is changing its lending practices, considerably. This is not new information; it has been anticipated for some time. The new changes were to have taken place in June, but have been delayed in August. The delay, in part I believe, is that they have not gotten the exact parameters for the changes laid out in stone, as yet.
Part of the change will apparently be in restricting the kinds of Businesses the SBA will support. The riskier the kind of Business, in the view of the SBA, the less chance it will back up the loan. This leaves it to the Bank itself to do the loan, it they care to make such a loan without SBA support, and Banks are notorious for not taking risk on their own.
For those of you who do not know what the SBA does, suffice it to say that it does not loan money, itself. It provides insurance, for lack of a getter term, to Banks which make the loans for Business purposes. These kinds of changes are common at various times in economic cycles, but this series of changes are more critical than most and will definitely hurt Business Owners that are thinking of retiring, any time soon.
Perhaps the most serious blow is that the SBA appears to be taking the position that it will not lend money as completely as it did in the past; it will rely on the Business Owner who is selling his/her Business to take a secondary note. Though the changes are not set as yet, as stated above, it is possible that the SBA will not lend on anything paid by the Buyer for Goodwill, or that it will lower the amount of Goodwill the SBA will guarantee. This will force the Business Seller to take at least part of the risk on financing.
Second, it appears that Bank of America and Citibank have both reined in their Lines of Credit, not only for Home Equity, but for some Business Lines of Credit, as well. (Remember that I have heard this from highly placed representatives in another Bank, but have not confirmed this with either of the two Banks named.) The Home Equity Loans affect a tremendous number of Small Businesses, because the Businesses themselves often do not have sufficient equity to provide security for Lines of Credit, on their own. Therefore, the Business Owner traditionally takes out a Home Equity Loan, or a Business Loan secured by his/her home, to secure the Line of Credit.
The reason these Banks have taken this action is largely due to the residential housing slump. If your Line of Credit was based on the value of your home - let's say your home was worth $300,000 when you initially set up the Line of Credit - it may be worth only about $240,000 in today's market, as far as the Bank in concerned. Therefore, there is far less security for the Bank, and so the Bank will refuse to lend on that basis.
Many Business Owners were not formally informed of this, and wrote checks from their Line of Credit accounts to the IRS to pay for their 2007 Taxes, only to find that the checks bounced! The Banks have not yet called in the loans, meaning they are not demanding immediate payment, but they are not honoring any withdrawals or extensions of credit, on this basis.
If you are one of the many Business Owners that has a Line of Credit, I would be extremely careful in calling my Bank, before writing any checks out of that account. Moreover, if you have already taken money out of that Line of Credit account, I would talk the situation over with your accountant. You may not want to pay that money back, any time soon. Pay the monthly interest or minimum payment, to be sure; but if you repay that money back in total, will you be able to rely on that account when you need it again?
Times are tough! As Small Business Owners, we can survive, and maybe even be stronger, as a result. (My philosophy is that crises breed opportunity!) But in order to survive, we have to anticipate and think ahead!
