It’s been called the “Silver Tsunami”, an average of 10,000 Baby Boomers are retiring every single day according to Investopedia[i]. A huge number of these Boomers are owners of privately held companies. As they transition into retirement, many Boomers will seek to transfer their businesses to a new generation of owners.
But there’s a problem – financing the sale of a business is tricky.
The Business Immediately Becomes More Risky
Lenders are constantly trying to assess the likelihood they’ll get paid back if they loan out money. Switching up the ownership of a business makes it inherently more risky. The management of a company can significantly affect its ability to turn a profit. If the company isn’t turning a profit it won’t be able to pay the lender back.
The Sale Price Might Not Be Backed by Collateral or Hard Numbers
Roped into the sale price of a business are things like accounts receivable, hard assets, debt and past financial performance but, beyond that, there are other less concrete things. For example, there’s value in the name recognition and reputation a company has. This is not tied to hard assets or something that can be liquidated so it creates more risk for the lender. These factors make financing the sale of a business more difficult.
This is Where the Small Business Association (SBA) Comes In
The SBA has two programs designed to help small business borrowers. These programs, which are administered by traditional lenders like banks and credit unions, can typically offer more favorable terms compared to a conventional loan because they’re backed by a guarantee from the SBA. This guarantee helps mitigate the risk a lender would take on if they were to issue a loan where there’s a lack of tangible collateral.
An SBA Loan Allows a Lender to Take on More Risky Loans
While a conventional loan might be denied because of the risk, an SBA loan spreads the risk between the lender and the SBA, allowing the lender to say yes more often.
SBA Loans are Even Being Used by Employee Groups
In April of 2018 congress passed the Main Street Employee Ownership Act. This new application or interpretation of the SBA makes it possible for firms to use SBA loans to finance employee stock ownership plans (ESOPs) which are an arrangement that can help transfer ownership of the company to employees.
The Popularity of SBA Loans Will Continue to Grow
As we see the “Silver Tsunami” build more momentum, we expect SBA loans to be utilized more often in the future. To learn more about WECU’s SBA program visit wecu.com/business-banking/loans/.
[i] Are We in a Baby Boomer Retirement Crisis?
Barbara Friedberg – https://www.investopedia.com/articles/personal-finance/032216/are-we-baby-boomer-retirement-crisis.asp