SBA Financing for Business Acquisition

Last night I attended a Webinar outlining the process of obtaining a SBA loan for business acquisition. SBA loans are similar to FHA loans for housing; they are government guaranteed. Essentially two types of SBA loans exist. SBA 504 loans are for business acquisition where real estate is also being purchased and SBA 7A loans are used for business acquisition not involving real estate, such as purchasing a retail shop in a mall.

There are 3 components to SBA loans. The first is buyer qualification, second is seller/business qualification, and the third is the application process.

Buyer Qualifications
Essential to buyer qualification is work experience and/or education in the field of the business to be acquired. Other qualifications include good credit history with scores above at least 625, down payment of at least 15%, personal guarantee, adequate reserves to cover living expenses and debt service. Of particular note if the buyer owns real property it will be attached with an SBA loan. What that means is the buyer's real property, say primary residence, will have a lien against it for the SBA loan.

Business/Seller Qualifications
The business or seller side of an SBA loan must also meet certain qualifications. The business must show steady or growing income on filed tax returns over the last 2-3 years. The lease terms must add up to the loan term. Most SBA loans are 10 years. The lease must be 10 years or increments adding up to 10 years, such as a 5-year term with a 5-year renewal. The seller must be willing to provide 2 to 6 months of training, although this training does not have to be done on site, it can be a combination of in-person and phone consultation. One important consideration that increases the strength of the application includes seller financing of 10-30%. This is increasingly common for business and commercial loans of all types. However, the seller cannot have an equity position in the company. Lastly, it is possible that SBA will loan working capital for 2-3 months during the transition. The seller can provide estimates for working capital to be included in the loan amount. Working capital cannot include buyer's income, but can include salaries to employees, product purchase, overhead, etc.

Application Process
The application process can be cumbersome, but it is designed that way to ensure the business is a good buy and that the business will survive. All of the following may be required for an SBA loan: application forms (about 14 different forms), tax returns from the business for 2-3 years, copy of the lease, photos of the business, personal resume of the buyer, 3-years of personal tax returns of the buyer, business plan (6-10 pages), and copies of appraisals if available (this may be required later). Keep in mind the buyer and seller/business qualification when submitting this material, for example, submitting a lease for only 2-years will not be sufficient.

Once the material is received, the approval process will take 2-14 days after which a letter is sent to the buyer that must be signed and returned for the loan to begin processing. Loan processing can take 20-90 days and closing (funding) can take 1-2 days.

All lenders are different. The SBA loan is guaranteed by the federal government, but the loan is issued by a local bank or commercial lender. Interview several lenders. Be sure they are familiar, if not experts, in SBA financing. For a lender recommendation as well as recommendations to excellent commercial brokers, please contact Connie@BozemanMontanaProperties.com.