At the onset on Covid in the spring of 2020, banks virtually paused all lending to small businesses throughout the country. Many acquisition transactions that were in process or even nearing a closing were put on hold. In response to the immediate and severe impact of lockdowns imposed by health authorities, many bankers refocused their attention on PPP and EIDL loans. Most banks and the SBA were completely overwhelmed by the dramatic increase in PPP and EIDL loan requests.
We expect SMB seller financing to be robust in 2021. As banks, credit unions, and even alternative lenders have continued to focus on SBA emergency lending, they no longer have the bandwidth (or even perhaps the interest) to offer purchase money SMB loans. Pre-pandemic, it was already difficult for a SMB buyer to qualify for a SBA 7a loan (approval rates through big banks were reported by some to be as low as 25%); the approval rates are even lower now. While some sellers may opt to keep their business and wait for conventional financing to return, many sellers are learning to accept that the best - and only - alternative in this environment is seller financing.
While we believe that seller financing is a valuable tool to facilitate the sale of a small business, we encourage sellers to consult with an attorney, CPA, or business broker to understand the risks involved.