Financing the Small Business (Part 3 of 3)

Financing the Small Business (Part 3 of 3)

Where is the SBA Going?

For those business brokers who don’t understand seller financing and remain dependent on SBA financing, continue reading. The “Great Recession” may very well change the rules of selling businesses.

“Conclusions — The SBA retains political support because it is a tool for policymakers to signal their support of small businesses. At the same time, SBA supporters have cultivated a myth that being against the agency is equivalent to being against small businesses. In reality, the great majority of American small businesses have thrived without government subsidies. The SBA’s lending programs benefit a relatively tiny number of businesses at the expense of taxpayers and the vast majority of businesses that do not receive government support. Even though there are no substantial economic benefits of the SBA, the agency has remained politically entrenched. It gains particularly powerful support from the banking industry. However, with today’s huge federal deficits, policymakers should begin eliminating unneeded business subsidies in the budget, including SBA spending.”

Source: “Terminating the Small Business Administration” by Veronique de Rugy and Tad DeHaven

Most people agree that small business is important in the growth of the US economy and the increase in jobs. However, a very recent survey in the Rasmussen Report reported that 58 percent of likely voters do not believe that the federal government should provide loan guarantees to lend money to someone looking to finance a business. Many people (47 percent) still think that most small businesses get started (or purchased) with bank loans. Business brokers know differently.

Unfortunately, the money used for down payments on the purchase of a business used to come from home-equity loans, house refinancing or a second mortgage – they hardly exist today. Many homes just don’t have the equity they once had.

Fifty-nine percent according to the Rasmussen survey think that lowering taxes and government regulations will help small business better than guaranteeing loans. Apparently, the public thinks that one can walk into the local bank and borrow sufficient funds to start or purchase a business. Unfortunately, that’s wishful thinking.

Business brokers never did realize that the SBA guaranteed less than 5 percent of business sales. See the chart below:

Table 1. Top 15 Industries Receiving SBA Loans, Average Loan Data, 2001 to 2010

Industry# of SBA Loans Per YearSBA Loan Failure Rate# of Small Businesses in IndustrySBA Loan Ratio
Full-Service Restaurants3,41423.3%195,1631.7%
Limited-Service Restaurants2,52925.2%145,1891.7%
General Automotive Repair1,10718.8%196,6720.6%
Gasoline Stations w/ Stores1,06617.3%52,7952.0%
Beauty Salons1,06621.6%582,9760.2%
Offices of Dentists1,0415.6%154,2540.7%
Hotels and Motels9387.0%65,5861.4%
Offices of Physicians9347.5%327,6260.3%
Landscaping Services89119.1%377,4310.2%
Child Day Care Services82415.3%749,6470.1%
Offices of Chiropractors73114.6%57,7381.3%
Other Specialty Trade Contractors68821.8%n/an/a
Other Misc Store Retailers67526.6%96,1150.7%
General Freight Trucking, Local63126.6%214,1400.3%
Offices of Lawyers62510.1%386,2580.2%
Total for Top 15 Industries17,15917.4%3,601,5900.5%
Total for All Industries67,55519.4%28,255,2440.2%

So, it is possible that when it comes time to cut expenses, the SBA could be hit and not be funded sufficiently to provide loans for small business or to guarantee them. Now is the time to get back to seller financing. And, even if the SBA comes roaring back (I sincerely doubt it), it will be very easy to tell the seller – we can get you SBA funding for the sale of your business, which means you will get all cash. Remember, there are tax ramifications for receiving all cash especially if the capital gains tax goes up.

Most sellers will understand. Those that purchased an existing business know exactly what you are talking about and may still owe money to the previous seller. Not many buyers pay all cash. The hardest seller to convince is one who started his or her business from scratch. They may have paid for everything as the business grew over the years. Most business brokers won’t list a business unless the seller is willing to list it at or close to the figure that the broker has come up with. (I could come up with a whole article – or more – on this subject). The real key to selling the business is not some price a business broker thinks it will sell for, but rather whether the seller will finance the sale. Business brokerage is a down-payment-oriented business, not a full-price one.