SBA Responds to Concerns Regarding 'Goodwill' Financing

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The Small Business Administration (SBA) has announced that it is accommodating concerns raised regarding new limits on "goodwill" financing. "Goodwill" is the difference between what a buyer pays for an existing business and the book or fair market value of the assets of the business (e.g., a value based on the "expected continued customer patronage due to its name, reputation, or any other factor," as defined by H&R Block).

SBA had announced that it would cap a business' goodwill value to no more than half the loan amount, up to $250,000. Now, SBA will consider loans for larger goodwill amounts on a case-by-case basis through August 31, 2009. "We are aware of the concerns surrounding SBA limits to goodwill lending and are taking measured steps to address those concerns in a responsible manner," said SBA Acting Administrator Darryl K. Hairston in a press statement. "SBA is committed to helping our lending partners finance small business, but access to capital must be balanced by our need to manage the risks in our portfolio and the implications those risks have for potential costs to the taxpayers."

The new guidance, issued on February 6, 2009, allowed use of SBA-backed loans to finance goodwill up to a maximum of 50 percent of the loan amount, up to a maximum of $250,000. However, the agency received comments from lenders and business brokers expressing concern that such limit would effectively stop business acquisitions at a time when many newly unemployed individuals are considering the purchase of a business.

After what it described as a thorough consideration of the comments, SBA decided to review loan applications that do not meet the guidelines in its Standard Operating Procedures on a case-by-case basis. SBA will use the next six months to study the types of transactions involving substantial goodwill and consider a revision of the policy in September 2009.

In related news, on March 5, SBA expressed its continued support of the Federal Reserve Bank of New York and the Treasury Department as they unveiled new details of a joint program, the Term Asset-Backed Securities Loan Facility (TALF), to help improve market conditions for asset-backed securities, including SBA-backed loans. TALF was announced in November 2008 to inject new life into a secondary market that had virtually ground to a halt in October, making it very difficult for lenders to sell loans they make -- including SBA-backed loans -- and use the proceeds to make more loans. TALF is intended to help unclog the secondary market for SBA loans by making funds available to investors and brokers to purchase loan pools.

About $4 billion in securities backed by SBA-guaranteed 7(a) loans are bought and sold in the secondary market each year, with the total outstanding amounting to about $15 billion. At present, an estimated $3 billion of that amount is essentially frozen thus hampering the ability of some of SBA's lending partners to make new SBA-backed loans. The loans that investors will receive from TALF can be used to purchase these securities from brokers, which would inject much needed liquidity for lenders to be able to make new loans.