Buying a Manufacturing Business: Why Your Choice of Lender May Squash Your Deal

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We’re seeing more and more cases where there are multiple buyers for a manufacturing business. For buyers, it’s important that the seller view YOU favorably as opposed to your competition and sometimes that’s due to the choice of lender.

There’s one type of loan that could potentially put you on the bottom of the seller’s list and could potentially squash your deal. As a condition of loan approval, some SBA lenders routinely require that the seller execute an SBA Standby Agreement.

Typically, Standby Agreements provide for the deferment of payments on notes due to the seller in order to accomplish one of two goals. For credit-related reasons such as deferring payment on debt to improve the cash-flow for underwriting purposes; or to qualify debt as an equity injection.

Regardless of the reason, Sellers do not appreciate restrictions on when they can receive payments from the sale of their businesses. In some cases, sellers will take less money and go with a buyer who is not using the SBA as a choice of lender.

There are other reasons that buyers may want to avoid using the SBA. Lenders must pay a guarantee fee to the SBA for each loan the SBA guarantees (lenders typically charge the fee to the borrower). The amount of the fee is calculated as a percentage of the amount guaranteed by the SBA (not the total amount of the loan).

For loans from $150,001 to $700,000, the fee is 3% of the guaranteed amount. For loans from $700,001 to $5 million, the fee is 3.5% of the guaranteed portion up to $1 million, plus 3.75% of the guaranteed amount above $1 million.

When comparing SBA interest rates to standard bank loans, you need to consider ALL the fees charged for an SBA loan. It might be wiser to go with a different type of loan product, especially if you have competition for the purchase.  So in some cases, the choice of lender really really can squash your deal.

Contact us with any questions or to give us your criteria so we can find what you’re looking for.

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