The words to note in the above rule are “does not require”, meaning that a lender can, and do, place liens on many borrower’s property’s when they have little to no equity value left in them. This is an optional rule that many lenders choose to ignore. This rule also can apply to commercial, rental, and investment properties of the borrower. Knowing that most borrowers will not be aware of this rule, or push a lender to utilize it, many high net worth borrowers just choose an alternative financing option or make other decisions instead of purchasing a business. Some just allow the lender to place those liens thinking that it must be an SBA rule with no options. Now you can inform them of the actual rule and possibly save a deal, and maybe a property or two.
These two rules are the first things we address with each of our high net worth borrowers. We want them to know there are avenues of protecting assets that do comply with SBA rules. We explore each home value to determine the most appropriate amount when assisting with a borrower’s financial statement and prior to lender submission. It becomes all about knowing the answers before the questions are asked.
- Anyone owning any shares of stock must leave the operation upon closing. They are permitted to work for the new owner as a consultant for a period not to exceed 1 year.
- The SBA cannot be used to purchase a “passive business”. This means the buyer(s) must have a plan to operate the business that their buying and it cannot be run absentee.
Typically, lenders want to see a plan showing that the borrower lives within 45 minutes of the target, or will be living within 45 minutes of the target post-closing. Keeping important staff like managers, et cetera becomes a bit of a challenge as the SBA is looking for anyone considered a “key” employee. Wording here becomes more important than you might be aware of based on today’s rules. Lenders are advised to watch for “key employees”, and determine how important they are to the success of the operation. If they are shown to be very important, the SBA advises lenders to have them guaranty the loan to confirm they stay with the company, a policy that is not what many high net worth borrowers wish to hear or address. This is where every word submitted to a direct lender must be read and addressed if necessary, BEFORE application submission.
Keeping in mind that the loan amount requested is typically much lower then the selling price due to the injection of down payment monies and seller notes (if any) that both affect and reduce the loan amount and, in most cases, below the appraisal values. This is also an optional rule that allows the lender to demand the selling price of the business be adjusted lower to meet the valuation. There is a similar rule which applies to commercial real estate, but we will not get into that today, just know it exists.