Everyone knows the housing market has tanked and that “banks aren’t lending”. What is less commonly known is that the lack of debt financing has been a key factor in making it more difficult to buy or sell a small business. Recently, I had the privilege of sitting down with Melissa Knutson, a business banker from Chase in Colorado Springs and asking her about the state of small business lending in Colorado Springs.
| NextExit: | Let me ask you the obvious question: is Chase still lending? |
| Knutson: | Yes! Throughout the “credit crunch”, Chase never stopped lending to small business owners. In fact, we recently announced that Chase plans to increase its lending to small businesses by up to $4 billion in 2010, boosting expected new lending to about $10 billion to this vital segment of the U.S. economy. Obviously, our new loan volume will reflect demand from qualified businesses. Total outstanding loans and lines to this segment are currently about $29 billion. |
| NextExit: | If you’re still lending, how has business acquisition loan criteria changed in the last year? |
| Knutson: | There have been significant changes as recently as October 1, 2009. For example, Chase can only utilize preferred lender program (PLP) authority if:
a) The amount allocated in the business valuation to intangible assets is less than or equal to $500,000 OR b) The amount of intangible assets exceeds $500,000 but the borrower or borrower and seller inject at least 25% equity into the project (seller financing is considered equity if it is on complete stand-by, with no principal or interest payments allowed for at least two years). President Obama has announced new proposals that would be added to the Stimulus Plan approved earlier in 2009. One of the most interesting is a proposed increase of the cap on 7a loans to $5 million (from $2 million). All of these new proposals require Congressional approval and then implementation time by SBA. We are hopeful that the changes will occur soon. (Note: Here is a press release from the SBA on Obama’s proposals) |
| NextExit: | What are the key features you will look for when making an acquisition loan? In other words, if I am a potential purchaser of a small business, how should I structure the transaction to get financing from you? |
| Knutson: | The first requirements we look at are the 3 C’s: Credit, Collateral, and Cashflow just like we do for any other loan.
Credit: We look at both the borrower and the business to determine if there has been positive credit and management history. Collateral: Is there sufficient collateral as a secondary source of re-payment? Collateral requirements are highly effected by the industry of the business. Cash Flow: Does the business (and the borrower) have sufficient cash flow to support the business as well as the additional debt payments? Specifically for the SBA program, there are additional restrictions on the structure of the transaction:
On a personal note, I want to know that the buyer has done their homework on that business. It is critical that buyers take the emotion out of their decision as much as possible and truly understand the business, its financials, obstacles and what effect they will have on that business. |
Melissa Knutson is Relationship Manager with Chase Business Banking RM Channel in Colorado Springs, CO. Melissa can be reached at (719) 227-6497 or by email at melissa.j.knutson@chase.com.
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