Banks often use the Small Business Administration 7a program to guarantee acquisition loans for small businesses. Because small business ventures face unique risks, most do not qualify for conventional bank financing. In most states, the SBA program is the only option; however, here in California a less well known alternative called the California Loan Guarantee Program is also available.
California’s program is not new. Our state has been offering loan guarantees since 1968. It is administered by the State Business, Transportation and Housing Agency in partnership with the Governor’s Office of Business and Economic Development. But it is much smaller than the SBA program. Our state program approved over $187 million in loans in 2015/16 while the SBA programs (7a and 504) approved over $5 billion in California loans in 2016.
One reason that the State program is not always a first choice is because of the shorter loan term of 7 years as compared to 10 years for the SBA program. A 7 year loan results in higher monthly payments and more stress on the business.
Comparison of California Loan Guarantee and SBA 7a programs
|Guarantee Maximum||$2,500,000, or up to 80% of the loan whichever is less.||$5,000,000, between 75% and 85% of loan value.|
|Loan Term||7 years||10 years|
|Amortization||Up to 25 years||10 years|
working capital, equipment,
business expansion, real estate, acquisition
|purchase equipment, fixtures, lease-hold improvements; working capital; inventory or starting a business, acquisition|
However, in specific cases the State Program has some clear advantages over the SBA program. Generally the State Program requires less paperwork and the qualification requirements are not as stringent as the SBA program. For example, the SBA program requires that the business seller completely divest of his interest in the business and not play a formal role in the operations of the business for more than 12 months after it’s sold. The California program, on the other hand, does not have these requirements which gives participating banks more latitude in structuring deals.
Not all banks participate in both programs so if you are a prospective buyer in need of a loan it is a good idea to shop around. The bank providing the loan must provide justification that the loan is helping to create or maintain jobs in California, which is typically not an issue when the loan is intended to fund an acquisition of a small business.
Contact Adam Wiskind at email@example.com with any questions or for help buying, financing or selling a California business.