A few weeks ago, Agenda reader Roland wrote to say that just as Congress was bulking up Small Business Administration lending by passing the stimulus bill, "the SBA cut off the knees of the 7(a) program."
The new SBA regulations taking effect March 1 limit the amount of goodwill that can be financed to $250,000. Almost all small businesses are service oriented and goodwill is a substantial portion of any SBA 7(a) loan. Heavy asset businesses with lots of machinery are top heavy with existing debt and usually do not produce cash flow (not good acquisition candidates). Plus, the banks will only value the hard assets at liquidation value as collateral anyway.
The result will be no SBA 7(a) lending to small business over $300,000 in value.
Though Roland was wrong about limiting lending to companies worth less than $300,000, he was right about everything else: the SBA intended to limit goodwill financing to 50 percent of the total loan, up to $250,000. "Goodwill is one of the riskiest assets that can be financed because it typically has no liquidation value," an SBA spokesman explained last week. Prior to the new rule, he added, the agency's Standard Operating Procedures said only "that sellers should finance the goodwill when they sold a business, but we found that SBA loans increasingly were being used to finance goodwill along with other real assets."
Fair enough, but the new rules left business brokers and some bankers—and folks like Roland—howling. "The SBA's goodwill cap eliminates a very important source of financing in the businesses-for-sale marketplace," Gaebler Ventures President Ken Gaebler told WashingtonPost.com's Sharon McLoone. "The result is that it will kill a lot of deals for buyers who have offers on the table." The SBA reports that banks have come down on both sides of the issue; according to the agency, "several lenders stated that they do not finance goodwill on a conventional basis."
Roland and the other critics should be pleased to learn that their voices have been heard. Last Friday, two days before the new regulation was to take effect, the SBA put it on hold. Instead, the agency will review each loan where goodwill financing exceeds the new rules, at least through August 31st. In the meantime, the agency will continue to study the issue and take comments from interested parties. (If you want to speak your mind, send an email to SOP50-10Modernization@sba.gov.)
The reversal is another sign that the Obama Administration is putting its stamp on the agency. Just a day earlier, the White House released a preliminary budget for 2010 that would boost the SBA's appropriation to $700 million, about 45 percent more than what the Bush Administration had sought for 2009, excluding disaster aid. (Congress, however, has historically been more generous to the agency.) Reconsidering the goodwill question is more subtle, but no less important. Before President Obama took office, his allies at the Center for American Progress Action Fund, a nonprofit organization lobbying for a centrist Democratic agenda*, drafted a whitepaper outlining new priorities for the agency. The "willingness to assume risk is under threat at the SBA," according to the report. "The agency is no longer taking the risk needed to make the economy grow." Report author Fred Hochberg served on Obama's SBA transition team. Now his vision for an SBA with an appetite for more risk may be taking shape, starting with a review of the goodwill rule.
*An earlier version of this entry mistakenly identified the paper's publisher as the Center for American Progress, a think-tank affiliated to the Action Fund and led by top Democrats, though it is officially non-partisan.