There are a number of ways to finance the purchase of a business including but not limited to cash, a combination of cash and a promissory note, through a 401(k) rollover investment or an SBA loan. Today we will be discussing the latter, the SBA loan. In the coming discussion, you will learn what the SBA loan qualification and closing process look like.
An SBA loan is a type of loan where a portion of that loan is guaranteed by the U.S. Small Business Administration or the SBA. This guarantee represents the portion of the loan that the SBA will repay to the lender should the borrower default on their loan. There are a few main steps in the process towards the qualification and closing of an SBA loan.
- The first step is to contact a lender that participates in the SBA loan program. This can be a long list of lenders, so we recommend reaching out to an SBA preferred lender. Preferred lenders have been approved by the SBA to work with this loan program.
- When approaching lending via an SBA loan the lender is going to look at both the buyer and seller side of the business transaction.
- First, the lender will look at the seller's business financials to confirm the business has sufficient cash flow to cover the expected debt service of the loan.
- Second, they will look at the potential buyer's personal financials to ensure they qualify to borrow the amount of funds they are requesting for the business acquisition.
- Once the initial pre-qualification requirements have been met, the borrower (or buyer), the seller, lender, and broker will all work in conjunction to move forward with the loan and acquisition.
Some items to note regarding closing an SBA loan are as follows:
- The SBA requires a 25% equity injection from the borrower in order to obtain an SBA loan, with the lender loaning the remaining 75%. The 25% injection is often made up of 15% cash down from the buyer plus 10% seller carry (via a seller carry note).
- Any seller carry note on the business will be subordinate to the original bank financing for a period of two years.
- The SBA will require the completion of a few tasks prior to funding the loan:
- The borrower will be asked to present their personal financial statements to establish proof of funds. This will include three years of personal tax returns as well as bank statements, credit report, etc.
- Proper insurance is required prior to funding the loan. Different businesses have different insurance requirements, so we recommend you speak with a professional insurance broker to confirm compliance.
- The SBA will require you to collateralize the loan. This may look like the borrower listing the lender as a second mortgage on their home and/or a second title holder on their vehicle(s).
- The borrower will often be asked to provide a business plan for the future outlook of their business. This may also include sales projections or trends for the next three to five years.
Securing an SBA loan for a business acquisition can seem complex and daunting at the first glance but with the right team, it will be a very smooth process.
For more information on how to finance of business purchase please schedule a free consultation!
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Disclaimer: Transworld Denver is not a bank, lender or affiliate of the SBA. All views and opinions expressed in this blog post are solely those of the author.
Matt Prescott is an Associate Broker with Transworld Business Advisors of Denver. He has been working at Transworld since February of 2016 and teams up with Al Fialkovich to facilitate daily business transactions. Currently, Matt is working with all industries at Transworld and is knowledgeable on anything from restaurant listings to dog daycare businesses. If you are interested in buying or selling a business contact Matt today!
