The new changes are particularly helpful to individuals seeking to finance the purchase of a small business. It is common for the purchase price of a growing company to carry a large percentage of goodwill. As a result of the old $250,000 financing limit for intangibles, however, buyers of these companies have historically experienced considerable difficulty in obtaining SBA guaranteed financing. Under the new limits, it will be easier for a buyer to finance up to 70% of the purchase price with the SBA guarantee, even if intangibles represent a large portion of the business value. It is important to note that transfers to insiders will likely be treated differently from sales to a third party. Factors such as management experience are especially important considerations in this process. In many cases, the buyer (often an employee or relative) will have been involved in management of the business for three or more years. In addition, insider transfers are non-arm's length transactions, and the bank will likely require a valuation before approving the loan. Inside transfers also often have the benefit of more lenient seller financing requirements, as the bank will typically favor a buyer already involved in running the business rather than an untried third party. Check with an SBA lending expert to learn more about how the new policies can help business owners looking to sell.

 Lenders also stand to benefit from the recent changes, and it is expected that banking institutions will increasingly choose to participate in these loan programs. It has been notoriously difficult for buyers to finance an acquisition if much of the purchase price was attributable to goodwill, as it has no collateral value. The new regulations will make it possible for a buyer to obtain SBA financing for up to 90% of the loan amount (even amounts attributed to goodwill). This change will inevitably temper much of the reluctance exhibited by lenders in these situations, and thereby ease the process for many buyers. Lenders also stand to benefit from another regulatory change. Under the new rules, banks will not be required to submit loans including over $500,000 in intangible assets for separate SBA approval, as long as buyer equity and seller standby financing together account for over 25%. The approval process for these types of loans will therefore decrease in time by about two-thirds (from about six weeks to as little as two weeks).

 Although a buyer may meet the SBA minimum loan standards, it is important to keep in mind that the bank will likely have its own (more strict) criteria for loan approval. Although it will be necessary to contact the bank to determine its specific protocol, the following are some requirements and considerations that typically apply:

• Adequate cash flow. A bank will assess the company's loan repayment ability using the Debt Service Coverage Ratio (cash available for debt service divided by cash required for debt service). Banks will usually deny a loan if revenues have declined in recent years, although they may make an exception if the company can demonstrate a current stabilization or growth trend over the last nine months.
• Capital. In most purchases, the buyer will put 20% down (the bank will finance 70% and the seller typically assumes a note for the remaining 10%). In many cases, the bank will allow up to half of the required cash to come from sources such as family gifts, a tax-free rollover of a 401(k) or IRA, or home equity line of credit (as long as the buyer has an additional, unrelated income stream large enough to feasibly pay off the debt). A bank may also accept a seller's note on full standby, whereby the seller agrees to receive no payments until the senior bank debt is paid in full.
• Buyer management expertise. The lender will expect a potential buyer to have extensive and relevant ownership or management experience. This requirement may be waived in the case of an established franchise, as long as the company is not in the hotel/motel, restaurant, or construction industry.
• Collateral. It is rare for a bank to require a specific minimum collateral coverage; however, collateral coverage of 20% or more is preferred. Lenders will also favor proposals in which at least 51% can be attributed to real estate. Particularly strong deals may benefit from financing of up to $2,000,000 for up to 100% goodwill.
• Buyer credit and legal history. A FICO score of at least 650 is typically required, as is a relatively clear legal history. For instance, buyers are disqualified if they have ever defaulted or settled another government loan (such as taxes or student loans). The bank will also check to see if the buyer has previously committed a misdemeanor or declared bankruptcy, although the loan may be approved if either of these occurred over seven years prior to the loan application.
• Loan Amounts. Although the SBA currently limits loan amounts to $2,000,000 for non-real estate transactions (and up to $5,000,000 for 100% real estate deals), it is possible to combine SBA financing with other payment options to accommodate proposals with larger financing requirements. For instance, current asset-based lending or seller financing can be used for this purpose.

 The temporary provisions may only extend through the end of 2010, but Congress is expected to raise the overall guarantee limit to $5,000,000 (with up to a 90% guarantee) before July 2010.  In addition, the SBA 504 program limits for 100% real estate transactions may increase to $14,000,000.  While these developments are encouraging, banks are expected to continue to be cautious even if they have previously utilized SBA financing.  Most will likely require collateral support of a certain percentage of the loan amount (50%, for instance), particularly with larger loans.  It is also important to remember that the process of obtaining an SBA financed loan is as complicated as ever.  The considerable number of associated regulatory requirements can make the approval process somewhat problematical, but there are some banks that offer this type of financing at a national level.  Some initial research should be completed before submitting a proposal, as it will only waste time to approach a lender that does not provide buyer financing.  Most importantly, remember that these favorable conditions are likely only temporary, and a prospective borrower should move quickly to take advantage of them.