Thu 24 Sep 2009
SBA Raises Cap on Guarantee of Goodwill Financing
Posted by Megan Dorn under Business and Politics
After backlash from the lending industry, the Small Business Administration is changing its restrictions on the guarantee it extends on goodwill financing.
Prior to March of this year, goodwill financing, which is the amount of a loan used to purchase a small business’s intangible assets (brand, customer base, etc.), did not have any cap at all, at least not within loans guaranteed by the SBA. But in March the SBA capped that amount at $250,000 or 50 percent of the loan, whichever was lower. The hope was that the new restriction would prevent sellers from jacking up the price of their business’s intangible assets.
In the past several months, however, the SBA saw a backlash it hadn’t anticipated. The new restriction caused lenders to tighten up even further on business acquisitions. The SBA also collected its own data, which found that the average goodwill amount was close to $400,000, $150,000 more than its capped amount.
Now starting next month the cap on the SBA’s guarantee on goodwill financing will be raised to $500,000. This new guideline is meant to be a compromise between the pre-March free reign and the post-March tight leash. For companies looking to acquire small businesses, this restriction could provide a sense of security that they aren’t paying too much for that business’s intangible assets.
