Important news reported by Sharon McLoone over at our sister site, washingtonpost.com: a new Small Business Administration rule has capped, at $250,000, the amount that the agency will guarantee where someone who is taking out a loan in order to purchase a small business is looking to finance the acquisition of the existing business's "good will"--which is economist-speak for a business's non-tangible assets, such as its brand, as well as its cash-flow.
The actual cap is actually either $250,000 or 50% of the total loan amount. McLoone gives the example of someone looking to buy a business for $2 million, including a $400,000 down payment. While now (technically, the rule goes into effect on March 1) the SBA's uppermost limit would be the $250,000 figure, it previously would have been as high as $1.6 million. In other words, the rule all but ensures that fewer small businesses will be sold now.
What's the explanation behind this?
After all, SBA loans, particularly from its flagship 7(a) program, have plummeted, and the new stimulus package appropriated hundreds of millions of dollars to the agency for the explicit purpose of juicing these loans and getting small-business credit moving again.
Our best guess is that while the SBA wants to increase its lending, it and the federal government's main focus right now is in lending to existing small businesses so that they can most efficiently and quickly pay off their existing loans. That goal in turn serves the broader goal of buttressing the credit markets generally--hence the expansion of the agency's microloan program, which is specifically designed for small businesses with outstanding loans. While focusing on this, the agency is intentionally cutting back on lending designed for other purposes--such as making it easier for people to buy small businesses. Essentially, and with the larger macroeconomic situation in mind, the powers that be have determined that they would rather struggling small businesses move towards solvency, rather than move towards insolvency and a subsequent sale.
The problem with this, as McLoone is told by a business-broker (who is in the business of helping the sale of businesses--a job description that does not sound great in light of this new rule), is that, "Buying a business is a real option to a traditional job search. What happens [with the new rule] is the whole business acquisition market could come to a screeching halt." His Chicago-based firm's typical customers are apparently "middle- to senior-level managers in their 40s or 50s 'with lots of experience and a little nest egg who wouldn't have nearly enough money to pay for a business in cash,'" according to McLoone.
In other words, keeping the market for buying businesses open--as opposed to constricting it, as this new rule does--would effectively enlarge the labor market, which certainly doesn't sound so bad for an economy that is experiencing rapidly rising unemployment. So count us skeptical on this latest move.
American Express OPEN brings you the latest insights from noted business authors and experts in our special promotion with Slate BizBox.