No Payments for 6 months? Now you have my attention.
Under the provisions of the new CARES Act, the Small Business Administration (SBA) will cover the first six months of payments – including principal, interest, and associated fees – on new SBA loans. The loan must be closed from February 1, 2021 to September 30, 2021, and payments are capped at $9,000.
What is an SBA loan, and how do I get one?
SBA loans are government-backed loans, intended to promote economic growth and entrepreneurship. All major business lenders (e.g. Wells Fargo, JPMorgan Chase, Bank of America, etc.) offer SBA loans. The loan forgiveness program covers SBA 7(a) and SBA 504 loans, which have a variety of purposes including business acquisition, equipment acquisition, working capital to help manage cash flow, and business expansion. It does not cover Paycheck Protection Program (PPP) loans.
Are there any additional benefits during this SBA loan period?
Beyond six months of payments forgiveness on new loans, the additional benefits are as follows:
- The SBA is increasing its loan guarantee to 90%.
- The SBA is waiving guarantee fees, which range from 2.6% to 3.5%.
- Refinanced loans – both SBA and non-SBA – will also receive six months of payments forgiveness under this program.
- Borrowers that obtained SBA loans during the 2020 forgiveness period may qualify for another 3 to 6 months of covered payments.
The positive outcome of these benefits combined is that banks will be more willing to make SBA loans, as they are largely guaranteed by the SBA. These conditions bode well for those seeking to buy or sell auto centers and are also favorable for those wishing to invest in auto center business currently owned.
I want to buy an auto center. What else is important to consider?
It is an opportune time to purchase an auto center because:
- The temporary SBA loan forgiveness program will increase the ease of access to financing.
- Six months of no payments will significantly improve cash flows immediately following purchase.
- More high-quality auto centers will be available for purchase since current owners perceive the favorable lending conditions for potential buyers.
Buyers will need to obtain an SBA 7(a) loan. These loans are available in amounts up to $5 million with flexible terms, allowing for longer maturities and less money down. If wishing to purchase real estate, a buyer may obtain an SBA 504 loan. Both types of loans may be used in a single transaction to purchase an auto center and its associated real estate if necessary.
To qualify for these types of loans, borrowers must identify the auto center and/or real estate to purchase. If the seller filed tax returns for the business and/or real estate, the returns must be provided to process the loan.
It is worth noting that SBA loans are now a more attractive option for banks, as the SBA has guaranteed 90% of the loan amount.
What if I am a current auto center owner? Is it a good time to sell?
With the new SBA loan program in place until September 30, 2021, it may be a favorable time to consider selling your business.
The Covid-19 pandemic hit the auto center industry disproportionately hard, as lockdowns pulled drivers off the roads for weeks and months at a time.
However, there is reason for optimism since the availability of effective vaccines should enable further reopening of schools and businesses. Additional government stimulus will give the economy a further boost. Increased economic and recreational activity will increase the demand for transportation, and, thus the demand for auto center services. Finally, some people are opting to forgo airline travel, preferring instead to drive to their destinations. This factor will also contribute to increased demand for auto center services.
However, if your business has not rebounded to pre-Covid cash flows over the past six months, you may have to significantly discount the valuation of your auto center. Under such circumstances, it may be wise to hold off on selling your business if possible.
I am an auto center owner, and I do not wish to sell at this time. Can I still benefit from the SBA loan forgiveness program?
Current owners can avail themselves of this program by obtaining an SBA loan during the specified forgiveness period for real estate or equipment acquisition, construction, working capital to manage cash flows, and refinancing debt.
Depending on the exact use, a current contractor may obtain either an SBA 7(a) loan or an SBA 504 loan. Only SBA 7(a) loans can be used as working capital, and the maximum amount is $5 million.
SBA 504 loans are commonly used to refinance debt or purchase owner occupied real estate, and the maximum amount is $5 million from the SBA. Depending on the specific project and the lender, these loans may have a maximum amount of $11.5 million or more. The additional loan funds come from Certified Development Companies (CDCs), which are nonprofit corporations that promote economic development in their communities through 504 loans.
Both types of loans require only a 10% borrower contribution, and both will have six months of forgiven payments if closed before October 1, 2021. The forgiven payments will not be counted as income by the IRS.
Wait…so, everybody wins with the SBA covering the first six months of payments on loans closed between February 1, 2021 and September 30, 2021?
Yes, there advantages for buyers and sellers of auto centers, and there are benefits for auto center owners as well.
The experts at Black Iron Advisers are well qualified to assist you in the purchase, sale, or financing of your auto center. Black Iron Advisers exclusively represents their clients. As one of the few FINRA licensed investment banks serving the auto center market, Black Iron Advisers can provide a level of service and flexibility that business brokers cannot match.