SBA loans can be used for financing a business acquisition of up to $5 million, as well as purchasing commercial real estate, machinery/equipment, refinance of debt, or obtaining working capital for a business.
To many, the thought of obtaining an SBA loan may seem daunting, even overwhelming, but in fact SBA loans can be obtained relatively easily if you are well prepared and work with a bank that is a PLP (Preferred Lender Program) Lender. The process and paperwork is perceived to be extensive, however in reality it can sometime be easier than obtaining a conventional loan, and in some cases, the best (or only) option. For this discussion, I’ll focus on the basic items needed by a Lender from a Buyer for applying for an SBA 7(a) loan to purchase a business; however, the process can be applied to other SBA loans such as equipment or working capital loans and commercial real estate loans (SBA 504) with slight variations depending on the loan request.
The SBA loan type used to purchase an ongoing business is referred to as a 7(a) loan. The term of the loan is 10-years and the interest rate is based off the Wall Street Journal Prime Rate. A Buyer can finance up to 75% of the business acquisition project, and the Buyer’s 25% down payment requirement can be reduced if the Seller is willing to provide a carry-back note. For example, if the Seller carries a note for 10% of the transaction value, the Buyer’s minimum down payment would be reduced to just 15% of the transaction value, thus totaling the 25% requirement. Although this is the general structure for most business acquisition transactions, consult with your SBA banker as every transaction is unique. As of this writing, there is no prepayment penalty for SBA loans with a term less than 15 years.
As a Buyer, it’s not only important to have your financial information readily accessible and in-order, but also to have a comprehensive resume and details of relevant background experience and qualifications. Lenders prefer to see industry experience relative to the business being purchased, but the amount of relevant experience can depend somewhat on the level of technical complexity of the target business. Sometimes, just a general business acumen and prior business ownership experience can suffice – while other times a deeper level of technical experience may be required.
It’s important to have this information ready for a Lender to review in addition to your financials, in order for them to get an overall scope of a Buyer’s qualifications. Other items that will be required by a Lender from the Buyer will be the following:
- Last 3 year’s Personal Tax Returns
- Also tax returns for any affiliate companies owned 20% or more
- Personal Financial Statement (provided by Lender)
- SBA 1919 Form (can be found online)
- Management Resume Form (provided by Lender)
- Copy of prior year W-2’s
- Explanations for any prior credit blemishes
In summary, a qualified SBA lender familiar with financing business acquisition transactions should be able to assess a Buyer’s viability in obtaining an SBA loan rather quickly. However, Lenders take more factors than just a qualified Buyer into account when making a credit decision on a business purchase loan (e.g. cash flow, collateral, sales trends, liquidity, etc.), so be sure to discuss these in detail with your SBA lender to obtain the most accurate feedback.
As a specialist in SBA business acquisition loans, I’m well-versed in helping Buyers navigate the SBA process quickly and efficiently, which ultimately leads to quicker turnaround times and faster closings.
I can be reached at (310) 560-9661 and look forward to assisting in your next business purchase.
For additional information on SBA loans Contact:
Matthew M. Millett
Vice President | SBA Business Development
460 Sierra Madre Villa
Pasadena, CA 91107
LinkedIn Profile: https://www.linkedin.com/in/mattmillett22/