WASHINGTON — Bankers are cheering the Small Business Administration's decision to double the amount of goodwill value that can be financed in a loan to purchase a small business.
The change, which came last week in the agency's latest set of Standard Operating Procedures, allows lenders to finance up to $500,000 worth of value derived from nontangible elements of a business, such as client lists and copyrights.
Lenders who want to finance more than $500,000 worth of goodwill value can still apply for permission from the SBA to do so, or they can arrange a deal between the business' seller and its buyer for a 25% equity contribution to the total purchase price.
"They are addressing our issues, one by one, and seem to be taking the steps that are attracting new lenders to the program," said Tony Wilkinson, the president of the National Association of Government Guaranteed Lenders.
After having no clear policy on goodwill financing, the SBA told lenders in February that they could not make a loan to the buyer of a small business with more than $250,000 or 50% worth of its value classified as goodwill. SBA lenders immediately complained, and the SBA said it would review the rule and accept individual applications from lenders for goodwill financing that exceeded those limits.
Lenders appear satisfied with the SBA's final decision. "It's like a 180," said Lynn Ozer, an executive vice president at Susquehanna Bank. "It's quite a victory."
Eric Zarnikow, the SBA's associate administrator for capital access, said the agency's decision was based on an analysis of the loan applications that came in since the original $250,000 cap was put in place. Zarnikow said the agency received nearly 200 applications for exceptions to the $250,000 limit and ended up approving all but a select few of them. "That gave us comfort that the lenders were appropriately looking at the credit and looking at the numbers on the loans," Zarnikow said.
The SBA also for the first time established a long-term interest rate index from which SBA lenders can price fixed-rate loans. Though the numbers for the index have not been released, Wilkinson said he expects them by Oct. 1, when the new standard operating procedures take effect.
Letting lenders price fixed-rate loans based on a long-term index could make SBA lending more attractive in the current climate. Interest rates are expected to start rising soon, but lenders cannot price in the expected rise when setting a fixed-rate loan, since they currently have to base the price on a short-term index and adhere to a price cap.