We get email alerts every other week or so from the SBA saying that the 7A guaranteed loan program for buying a business only requires a proven history of stable cash flow that can support the debt payments, which means that goodwill (an intangible asset) can be used as collateral. These SBA email updates also tout that banks using this loan will be backed by the SBA with a 90% guarantee. If the loan defaults, the bank would only be responsible for 10% of the default value, the government would cover the rest.

However, this has not been the case in reality, just the opposite is true. Many banks are requiring a high-percentage collateralization of any SBA guaranteed loan in tangible assets such as real estate, equipment, inventory, and accounts receivable. The reason for this disconnect is that banks want more than just the government guarantee these days. They are being more careful and want more security.

Many businesses do not have enough hard assets to cover a loan and real estate values aren’t cutting it as they did in years past. If the business doesn’t have the collateral required to get the loan, the buyer would be required to pledge personal assets. This may not always be a winning scenario since it puts the buyer in double jeopardy if the business fails.

As a result, successful closings this year through SBA Loans have been 60% less than in previous years. Most deals are getting done with any combination of the following: