The Small Business Administration (SBA) issued a Procedural Notice on October 2, 2020 which offers business owners and lenders guidance on how Paycheck Protection Program (PPP) Loans are to be handled when a business has a change in ownership.
This post summarizes the notice and includes an Infographic to assist business owners. It includes the following topic:
When does a Business Sale Require the SBA’s Approval Does a Business Sale Require the PPP Lender’s Approval or Notification Required Steps Pre and Post-Closing for PPP Borrowers SBA Timeframe to Approve a Sale or Merger when a PPP Loan Transfers Does the EIDL Grant Impose Additional Steps When Selling a Business
On June 15, 2020, the Small Business Administration reopened the Economic Injury Disaster Loan (EIDL) applications to businesses with no more than 500 employees and non-profit organizations operating and suffering substantial economic injury as a result of the pandemic in all of the U.S. states, Washington D.C., and territories. Independent Contractors, sole-proprietors (with or without employees), gig workers and freelancers are also eligible to apply for the EIDL.
On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act (PPPFA), which is the latest attempt to save struggling businesses from permanent shutdown. The Flexibility Act offers business owners seven significant changes to the original Paycheck Protection Program (PPP) Loan terms. The House and Senate were driven to make these changes due to the lengthy pandemic and the fact that many PPP Loan recipients have not been able to re-open their doors for business during the required eight-week ‘covered period’ set forth in the original PPP Loan Act. The PPP Loan Flexibility Act will make it much easier for business owners to achieve full, or nearly full, loan forgiveness. The new law provides business owners with seven significant changes to the original law and those include:
Due to the wide media coverage over the availability of PPP Loans, the subsequent funding drought, and the numerous complexities involved in obtaining these loans, many business owners overlooked a different way to recover employee payroll costs if their business had been mandated to shut down by a governing authority or if their revenue had plummeted due to the Covid-19 pandemic. The Employee Retention Credit, under the CARES Act Section 2301, offers a viable and alternative way to recover payroll costs for any type of employer, except state and local government entities, regardless of their size.
The Small Business Administration announced on Thursday, April 16th all federal funds set aside for the Paycheck Protection Plan (PPP) Loans have been allocated to those business owners who were persistent (and fortunate) enough to get through the application process and receive an official registration number from the SBA via its bank. In simple terms, the PPP Loans are out of money to assist business owners.
On Friday, March 27, 2020, the Paycheck Protection (Loan) Program (PPL) for small businesses was approved as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This new law is intended to help small business owners in an unprecedented way. First, while the Paycheck Protection Program Loan will be initially set up by banks and approved by the SBA under section 7 (a), unlike other SBA loan programs, the PPL is guaranteed 100% by the SBA. Second, if the proceeds of the loan are used by business owners as Congress, the Senate and President Trump intended, the loan will be forgiven.
For many businesses, the ultimate goal is to sell the business. Can you picture it? Walk away from the daily stress and aggravation with a fat pile of cash. Hop a plane to your favorite tropical destination and spend the rest of your days lounging a white sandy beach, sipping pina coladas out of a coconut, without a care in the world.
Well, friends, the above scenario is the ideal scenario. I like sipping cold drinks on a beach as much as the next guy, and I hope that happens for you. But if you clicked on this article, you may be looking at a much different scenario.
And that’s what this article is going to cover: the less-than-ideal scenario.
There are several types of loans available to business owners — so many, in fact, that the options can seem overwhelming and confusing, especially to smaller business owners without a lot of experience raising capital. This guide will help educate you on the options so you can make a more informed decision about financing your growing business while limiting added risk.
In its purest form, Mezzanine Debt is a business debt instrument that carries along with it certain rights to convert debt into equity (stock, common shares, partnership interests, LLC membership units, etc.). Mezzanine debt financing is not a pure debt or a pure equity instrument. It is something in the middle. In fact, the word ‘mezzanine’ is derived from the Italian word ‘mezzano’, meaning middle, and is used to describe how this particular form of business capital combines elements of both debt and equity financing into one instrument.
Unfortunately, owning a business does not make someone an expert in financing. The lenders are the ones who know the ins and outs of rates and terms and documents. To even out the playing field, it is important for a small business owner to ask the right questions and consider the following factors when deciding whether to refinance:
Many small business owners borrow money to start and grow their business. And is often the case those same business owners find themselves hitting credit limits established by banks and other lenders causing enormous growing pains for the business. Simply stated, running out of business capital when you’re growing a business is difficult at best.
In the last six years, millions of Americans have lost their jobs and found it exceedingly difficult to find new ones, even after putting in decades with the same company. Many forward-thinking individuals among the unemployed have concluded that creating their own businesses and jobs may be their best hope for working again. The entrepreneurial spirit is still alive and well in America!
Debt Service Coverage Ratio compliance often is required or necessitated by covenants in a bank loan agreement. A bank loan covenant regarding the debt service coverage ratio will specify the amount of income a business and/or its guarantor must generate relative to the debt principal and interest payments on an annual basis to remain in compliance with the covenant. The business owner, or his or her CFO or Controller, should monitor this ratio carefully on a monthly basis so the covenant is not unintentionally broken.
The debt service coverage ratio is a measurement used by lenders to determine if a business is able to meet its debt servicing obligations through its operating income during a given period of time. In most cases, a lender wants the operating income to exceed the debt servicing costs by some measure. This ratio defines the extent to which a business’s operating income (or other defined measure of cash flow) exceeds the cost to service its bank loans.
Most individuals who consider themselves entrepreneurs believe they must start their own business to earn the title. However, what some do not realize is that the entrepreneurial spirit can be fulfilled in a variety of ways, not the least of which is purchasing an existing business. The following is a list of advantages for buying a business over starting one from scratch.
As markets recover post-recession, business owners are presented with growth opportunities. However, a business owner may not have access to the capital needed to execute on a growth strategy. Where does a business owner turn?
Many entrepreneurs faced with the demands on cash of a growing business are tempted to sell equity to outside investors, or perhaps give away stock to retain a valuable employee. Diluting your stake in this way may solve the immediate problem, but it can have unforeseen consequences when the business eventually is sold. Stockholders’ personal circumstances evolve in different ways over the lifetime of a company, and whatever the original intention everyone may not be on the same page when you are ready to sell.
Many business owners are under the wrong impression that their business debt will disappear when their business is sold. In some cases, the debt is absorbed or is assumed by the buyer. But usually this is not the case.
Recapitalizations can be used to provide liquidity to owners, refinance the balance sheet or fund future growth initiatives. When the owners sell a majority of the business but still retains some ownership, it is termed a “majority recapitalization”.
The Bank Workout Group is a department in a bank that handles what is known as the bank’s special assets. Banks send their troubled loans to this department to handle negotiation and management of the bank’s forbearance agreements.
EBIT is an acronym for Earnings Before Interest and Taxes. This is a term Bankers often use as a measure of a business’s earnings from operations. The EBIT reveals operating profitability without non-recurring or unusual income or expenses.
As I meet with entrepreneurs, I’m often asked the same question: “When is the best time for me to sell my business?” The answer to this question is not the same for every business owner, for many reasons.
I continue to be surprised as I meet with entrepreneurs who truly regard Venture Capital as their Holy Grail. It’s as though they are looking for a Super Hero to make their dreams of entrepreneurial success come true. But having spent more than a few sessions on the entrepreneur’s side of the table in negotiations with venture capital firms, I know better. And it seems there are others who share my opinion!
Not long ago, one of my dear friends abruptly stated “it’s not about you” after patiently listening to my long story about a business relationship which changed, without warning. I just love this friend and how she was able to candidly share her observation which has proven to be brilliant and incredibly powerful.
Working with successful entrepreneurs who are dedicated to growing and selling a valuable business offers me the opportunity to learn from the best. I pinch myself most days as I am invited into the lives of my clients and have the privilege of experiencing the ups and downs of entrepreneurship. Truly, it is my pleasure!
Often entrepreneurs find themselves in a situation where their commercial bank considers their existing line of credit too risky to extend or renew. This places the entrepreneur and their banker at odds, and many times pushes the business owner to take drastic steps to keep their company’s doors open and paychecks coming. Has this happened to you or one of your fellow entrepreneurs?
Many people discuss the importance of pivoting in the context of a startup business. And I agree, once a business launches, the entrepreneur must be mindful of what is working and what is not. That’s when it is time to pivot the startup.
Bankers and Entrepreneurs rarely see eye-to-eye. Recently, my observation of this unfortunate reality caused me to chuckle as I sat with one of my clients and her business banker. What made me laugh was how two extremely accomplished individuals could define the term “special assets” so differently.