SBA loans for all other business support services: a catch-all code where buyers outnumber the norm

A residual code, and what that means for underwriting

NAICS 561499 collects business support services that have no code of their own: contract meter reading, mail presorting and address bar coding, bar code imprinting, and a long tail of niche services that other businesses buy. Borrowers here share a customer type, other businesses, and little else. An underwriter cannot lean on an industry profile, so the first pages of the file have to explain the business in plain terms.

Fifty-five lenders made 128 loans, a high ratio of lenders to loans. That is what a catch-all looks like: few lenders make enough of these loans to build a view of the code. It also means the quality of the file does more work than usual, because the lender has no house view of the industry to fill the gaps.

The four questions a lender asks first

Without an industry to anchor on, an underwriter falls back on questions that apply to any service business sold to other businesses. Answer them in the first page of the narrative and the rest of the file reads faster.

• What exactly is sold, and to whom? One sentence a stranger can repeat: the service, the customer, and why the customer does not do it in-house.
• Is the revenue contracted or transactional? Multi-year service contracts, month-to-month agreements and per-job work are three different credits.
• How concentrated is it? Revenue by customer for the last full year. Support businesses often start by serving one anchor customer and never diversify.
• What does it take to deliver? People, equipment, a facility, a license or a certification, and whether any of it depends on one person.

The same answers also settle eligibility. SBA excludes some kinds of business, such as passive investment and lending, and a lender will confirm from the description that the borrower is an operating service company. Where one customer dominates, see customer concentration and debt.

Why so many loans buy an existing business

Eighteen of the 128 loans financed a change of ownership. Business support services are what many first-time buyers and searchers look for: companies that sell a necessary, unglamorous service to other businesses, earn repeat revenue under contract, and are small enough for SBA. The acquisition median of $445,550, at a median rate of 9.1%, is modest by acquisition standards, and well inside SBA's $5 million limit.

At that size several SBA rules apply at once. The table shows how they land on a purchase near the code's median.

A worked example in plain numbers: a purchase price of 500 plus closing costs and working capital of 40 gives total project costs of 540. The buyer needs equity of at least 54. A seller note of 27 on full standby for the life of the loan could supply half of it; the other 27 comes from the buyer. If the seller wants to be paid on the note from the first month, it cannot count toward the equity, and its payments join the SBA loan in the coverage test.

Lenders pay particular attention to whether the customer contracts survive the sale. Service agreements with larger customers often need consent to assign, and a customer's procurement team may use the change as a moment to rebid. See change-of-control consents and buyer industry experience: in a business-to-business service, lenders often accept management experience from a related field where the operating know-how sits with staff who are staying.

Franchises, start-ups and facilities

Franchises took 9.4% of loans and start-ups 10.9%. Business-service franchises give a lender a delivery model, pricing and a record across other units; the lender still reviews the franchise agreement for eligibility and reads the franchisee's own management background. A start-up must inject at least 10% of total project costs, and a start-up whose plan depends on one anchor customer should bring that customer's contract or letter of intent.

Thirteen SBA 504 loans went to this code, at a median of $826,000: the processing and sorting work in this code often needs space and equipment rather than an office. 504 finances owner-occupied real estate and long-life equipment, typically 50% from a bank, 40% from the CDC and 10% from the borrower, and the business must occupy at least 51% of an existing building. See SBA 7(a) vs 504.

In a catch-all code, the business description is the underwriting. Write it so a lender who has never seen your industry can explain it to a credit committee.

Preparing the file

The SBA list is the starting point: business tax returns for 2–3 years, a P&L and balance sheet with a year-to-date P&L through last month-end, a debt schedule with copies of any notes being refinanced, and personal tax returns and a personal financial statement for each owner of 20% or more. For an acquisition, add the target's latest full year of figures and the letter of intent. For a support-services business, also add:

• A one-page description of the service, the customer and the delivery model
• Revenue by customer, marked contract or per-job, with contract end dates
• The largest customer contracts, including assignment and termination terms
• A list of key staff and what each does, especially in an acquisition
• Equipment lists and quotes, where equipment is being bought

SBA requires debt service coverage of at least 1.15x, and 1.0x globally including the owners. Transparent builds the full lender package — financing model, lender presentation, blind teaser and underwriting memo — in a day once the documents are in, and takes it to SBA lenders in its book, where 278 write SBA 7(a) and 504. On SBA loans the lender pays Transparent, not the borrower.