A recent article from the International Business Brokers Association (IBBA) talks about the ‘Banker’s Dozen’ objections compiled from one of the top SBA lenders in the country. To have a successful and timely closing, start discussing documentation needed and addressing concerns early in the process.
Below are some of the due diligence items needed to avoid delays in getting a deal done.
Citizenship of the Buyer
- Early on determine the citizenship status of the buyer and obtain a copy of the documentation of proof.
- A buyer can secure SBA financing if they have a green card and are legal permanent U.S. residents.
Buyer’s Personal Credit Report
- A resume and Statement of Personal History questions are required for each guarantor. Knowing any issues early on give the bank time to clear through them during the underwriting. This will help avoid delays.
- If the buyer’s credit score is under 700, a written explanation should be provided.
More Equity in the Deal is Needed
- The Equity requirement for business acquisitions are changing with the release of the SBA’s new version of its Standard Operating Procedures (SOP).
- The SBA will be providing additional insight into these changes, the basic change is that the buyer must contribute at least 10% equity towards the entire transaction and there must be at least 10% equity on the post-transaction pro form balance sheet. A seller note can still be used and can provide for up to half of the required equity injection. However, the seller note must be on full standby (no payments at all) for the life of the SBA loan.
- If the buyer’s equity is coming from a gift, it will be required to have a Gift Letter with 2 months of bank statement showing the source of this gift.
Pledge of Personal Assets as Collateral
- If the business assets do not fully secure the loan, the SBA will require that any personal real property with lendable equity must be pledged as collateral. If your business plan and financial statements are strong, you might avoid putting up a lot of collateral.