Although certainly not as bad as the mortgage mess, the lenders that made business loans the past few years are seeing some of them default. A representative of one of the largest SBA lenders in the country told me a number of defaults have occurred, some on loans that were taken out not that long ago.
The reaction of course is to tighten up the criteria. Both the SBA (that guarantees a portion of the loan in order to compel the banks to make high risk small business loans) and the banks have instituted new guidelines. The following guidelines are not cast in stone. They are the guidelines that one bank uses, but banks ARE different, and you may find different conditions in other parts of the country.
One big difference is that the banks are looking for buyers that have direct experience in running that type of business. In other words, if you are selling a sign sales and installation business, you have to find a buyer with sign experience. That is a tough one, since many individuals are buying a business specifically for a career change. This does make selling to a key employee more advantageous than ever. The banks love that.
Another change is that the days of low down payments are over (there were loans being done with 10% down, but the loan included an extra 10% for working capital – basically zero percent down). A buyer has to have a minimum of 20% down payment plus working capital requirements.
Those selling their business are probably going to have to take a note (this is officially written into the SBA lending guidelines), and in many cases agree to not take any payments against the note until the SBA lender is fully paid off. I actually don’t mind this guideline because it definitely makes the seller think about how sustainable their business really is, but the note (which is subordinate to the bank) should only be a small percentage of the total. Unfortunately, we may be entering a period where large seller notes are more common.
The result of all this is that currently there are not a lot of loans being done, except for professional practices like doctors and dentists, which the lenders have always liked doing. The good news, if any, is that the lenders would truly like to make loans – on their terms. I’m basing this on one lender, so if someone knows something different, please let me know or leave a comment.