SBA rules discriminate against RV dealerships
Here’s yet another example of our federal government punishing small business owners for being successful. I learned that the Small Business Administration limits the amount of loan money it will guarantee to people wanting to buy profitable RV dealerships. In fact, any retail business that grosses more then $6.5 million annually does not qualify for SBA financing.
In fact, it’s not even “financing” we are talking about; it’s just a signature that indicates if the loan goes bad the SBA will cover up to a certain percentage of the loan amount. Banks like these deals because they don’t absorb 100 percent of the risk. The SBA jumps in to reimburse the bank for something like 40 percent of the loan amount.
The issue came to light when someone forwarded an article to me that appeared on a business Web site about one guy’s attempt to buy an RV dealership. The buyer needed an SBA loan to close the deal. The dealership posted net profit of $440,000 and the owner was selling the business for only $550,000. It looked like a good opportunity for some entrepreneur. Here’s the catch. The business grossed $13.5 million annually in sales — more than double SBA’s common size standard for a small business.
I’ll admit to being an idiot editor with limited business sense, and when it comes to banks I am pretty sure I will never understand how they arrive at loan decisions. I also recognize that this is a federal agency I’m talking about, not a bank, so all common sense goes out the window. But, if you buy a business with a cash flow of $13.5 million for $550,000, and that business drops $440,000 to the bottom line every year for three years — doesn’t that prove the business is healthy and that the loan is relatively secure? A simple loan calculation shows the payments would be about $80,000 a year which still leaves ample profit for the new business owner to personally use or reinvest into his business.
Few people will disagree that small business is the engine of the American economy. More jobs are created in small business every year than all corporations combined. It is essential that we create an environment that is attractive to entrepreneurs and rewards them for working hard and taking risks. As I see it, the purpose of the Small Business Administration is to help business owners either buy or start small businesses that will create jobs, and thus taxpayers for the federal government. They should be willing to support any reasonable effort to start or buy a business, especially those that are proven successful in creating well-paying jobs.
In the process, the federal government can’t be stupid. They need to be reasonably certain that the business will survive and thrive before they risk taxpayer’s money. I could understand the SBA being nervous if someone were to need a $13.5 million loan when the business only had $440,000 available to pay it off. But this isn’t the case. And why should it matter what the top line of the business is anyway? It’s what he keeps that counts, isn’t it?
The $6.5 million SBA cap is unreasonable and unfairly applied across the board to all retail operations regardless of what it sells. A theater owner selling $8.50 movie tickets and $8 tubs of popcorn would have to serve 393,939 customers before it crossed the $6.5 million threshold. On the other hand, an RV dealer would only need to sell 162 $40,000 RVs before he reaches the same ceiling, not including service, F&I, parts and accessories.
So, if banks won’t lend 100 percent of the money without collateral or some type of federal loan guarantee; and the federal government won’t loan money to buy a reasonably successful dealership because it sells expensive motorhomes, not movie tickets or widgets; what is an RV dealer suppose to do when it’s time to exit the business?
Ironically, the SBA’s own Web site features a section on exit strategies for small business owners. One of the articles posted to that site contains this gem:
The process for getting out of business successfully requires the same amount of planning as going into business. While the process should be easier, it is likely to be less enjoyable and more stressful. The best advice for business owners is to think about the future during the early stages of getting into business. Exert managerial influence to ensure that complications and problems which could affect dissolution and net value do not develop into roadblocks. When the time for getting out of business comes, engage the invaluable expertise you will need, and prepare a plan.
So there you have it. The SBA says it takes planning in the early stages of business development to successfully get out of a business. Apparently that means you should plan to only grow so much. Limit your sales, reduce your profitability, don’t sell many $100,000 motorhomes, don’t hire staff to service customers and you’ll be a true “small business” as defined by the federal government.
You might not have many customers, but at least the poor schmuck who will eventually buy your business will qualify for an SBA loan.
January 26th, 2008 at 1:11 am
Eric…
Thanks for this, I’m writing an ebook about starting up businesses right now so this post was very informative….
October 21st, 2007 at 1:41 pm
Jerry from Hotlanta,
Maybe you should sit back and relax. I challenge you to point out where I called the SBA loan program looney.
You’ll also note that I admitted to being an “idiot editor with limited business sense,” so I’ll agree that my understanding of how business lending works is truly zilch. So, with will all your experience working at SCORE, rather than sucking up to your pals at the SBA, please show me, and our readers, what was actually wrong with the example I gave.
My point is still valid — that this federal agency discriminates against various types of businesses based on very subjective standards. The SBA calls an RV dealership a “big business” simply because they sell 43 $150,000 motorhomes a year — and that determination eliminates them from SBA loan guarantees.
Yet, this same agency feels that a construction company building 206 $150,000 stick homes is still a “small business.”
The whole point of this article is not about the validity of this particular loan — it’s about how Small Business Administration subjectively treats one business differently from another. I’d expect more from a government build on the foundation of “equality for all.”
October 19th, 2007 at 1:19 pm
First, my appreciation to Mike Stamler for his reply. Note that he is a savvy SBA public information officer. Also notable, is that the author’s understanding of how business lending works and knowledge of the subject deal is zilch, nada, bupkis! So I would suggest that before he call SBA’s guaranty program “loony,” he brush up on the program and deal-points involved.
October 19th, 2007 at 11:51 am
This is why repurchase agreements are in place, to help mitigate some of the risk. In fact, the repurchase agreements are much better and less expensive than an SBA deal. The manufacturers know that these repurchase agreements help in these types of situations which helps them sell more units.
October 17th, 2007 at 2:33 pm
Mike,
Perhaps you could explain why the SBA considers a construction company doing $31 million in business to be a “small business?” Why are special trade contractors with $13 million in annual revenues considered a “small business?” Why are manufacturing companies employing 500 people considered “small business?”
All of these firms are entitled to loan guarantees from the Small Business Administration. But an RV dealer that sells three RVs a week comes perilously close to being considered “big business.” It doesn’t make sense.
My point is that the SBA is very subjective in determining what is and is not a small business. In this industry it is possible that an RV manufacturer, or even a dealer, could sell six RVs to ultra high-end customers and make more than $6.5 million in annual sales.
You can’t be serious that selling six motorhomes a year makes a company a “big business.”
October 17th, 2007 at 1:42 pm
I would suggest that the government should not be in the business co-signing for loans. I have been brought up believing that co-signing is not a good thing. I would also suggest that if everything was as strong as is suggested here that the bank would loan the money with out a problem. Remember banks loan money based on how much you need it. The less you need it the more they will loan to you. If the company is doing that good then they would like to do that. they are in this for profit as well. The only one who does not care about profit is the government which is what this article is saying we depend on as small business.
Our business has never used the SBA nor will we. We have made it the hard way through work and success.
October 17th, 2007 at 7:56 am
You have to draw the line somewhere. I think the SBA acted appropriately in this case. There ought to be plenty of other sources of private venture capital for a deal this good. All the prospective buyer needs to do is go looking for them. An accepted offer and a good business plan in hand is all he should need.
October 16th, 2007 at 2:34 pm
That particular loan makes sense as it is described to us but normally business lenders want to see 3-5 years of gross and net income and they will take an average income in which to base their decision regarding the loan.
In the current marketplace, there are RV dealers all over the country that sold units to FEMA which affects their year-over-year sales. This means a dealer with $13.5 million in sales and a $440K net for 2006 could of easily had $6 million the year before with a $100K net. This why it is important to know the whole story with all the details.
As for the RV buyer you spoke about, if the year-over-year net income averages somewhere close to $440K, then he should broaden his range of lenders to find an educated commercial lender.
The other variable is the strength and background of the buyer. Not just anyone can get the $4 million credit line required to facilitate a business with $13.5 million in sales. Floorplan companies want to see some experience and $$$ in the bank.
October 16th, 2007 at 1:48 pm
Well, the fact is, the decision is not based on the economics of the deal. If the economics of the loan were so clear-cut and perfect, then the bank would be able to do the loan without any SBA enhancement. In fact, the bank would prefer to do it without SBA assistance, so it could collect all the fees itself, instead of having to forward them to the SBA.
The fact is, at $13.5 million a year in revenues, it’s just not a small business anymore, and the law does not allow the SBA to provide a loan guarantee for a business that’s not small.
Simple as that.