New guidance issued by the Small Business Administration (SBA) will loosen the limits of the 7(a) loans ability to finance goodwill (intangible assets) in franchise business purchases with changes in ownership.
Goodwill is the term used to describe the intangible assets of a business, verses the hard assets such as equipment, buildings and real estate. Earlier in 2009, the SBA advised lending banks to disallow funding loans toward franchises and businesses if goodwill amounted to more that 50% of the loan amount with a maximum of $250,000.
Upon the urging of franchise and business industry leaders, the SBA has reconsidered its limits. The new guidelines will take effect, October 1st.
The SBA’s SOP 50 10 5(B) Lender and Development Company Loan Programs states that the eligible uses of loan proceeds can be used to purchase intangible assets of up to $500,000 if the buyers and sellers have an equity injection of at least 25% of the purchase price. If the intangible assets are less than $500,000 then the former equity injection is not required.
These loosened guidelines should assist in financing franchise purchases in cases where intangible assets exceed $500,000.
