The majority of our business sales are financed with an SBA 7A loan. This type of financing is a win-win situation for both the buyer and seller when compared to seller financing. The buyer benefits from a lower down payment and longer financing period. The typical SBA lender requires a down payment of 15% to 25% with a 10 year repayment period. Seller financing, on the other hand, generally requires 40% to 50% down with the balance to be paid within 5 years.
The lower initial cash investment and monthly payments allow the buyer to purchase a larger business than would be possible with seller financing. Sellers also benefit when buyers acquire an SBA 7A loan. The lower down payment greatly increases the number of potential business buyers and that in turn increases the chance of receiving a higher price for the business. The biggest win for sellers, however, is that they get all or most of the purchase price at the closing.
Types of SBA Loans
There are two types of SBA loans commonly used to buy a business. The 7A loan mentioned above is used to buy the business, its assets and goodwill. These generally have a 10 year term with interest rates 2.75% above prime. The maximum loan size is $5,000,000 with the SBA guaranteeing 75% of the loan amount.
A second type of SBA financing is a 504 loan which can be used to buy the equipment and commercial real estate used by the business. This loan usually has a 20 year term with slightly lower interest rates than a 7A loan. The focus on this blog is the 7A financing.
Most people seeking to buy a business are somewhat familiar with SBA loans, but they are often unaware of how to find good SBA lenders. These are generally banks, and while the SBA has certain loan requirements, the banks often establish their own additional requirements and preferences.
The first thing a business buyer should look for is a “Preferred” SBA lender. These lenders must be approved by the SBA and are more experienced in handling this type of financing. Dealing with a preferred lender simplifies and shortens the process because the lender is allowed to approve the applications rather than requiring the application to be approved by the SBA. Dealing with a Preferred lender will generally shorten the length of the process. For a list of SBA lenders, that identifies those who are Preferred lenders, go to your local SBA website.
Cash Flow vs. Collateral Lenders
SBA lenders fall into two broad categories, “cash-flow” lenders and “collateral-based” lenders A cash-flow based lender is interested in financing businesses which generate enough cash flow to make the loan payments, cover the buyer’s income needs and provide a margin of safety. A collateral-based lender uses this criteria also, but, in addition, will require enough collateral to support the loan. We primarily send prospective buyers to cash-flow lenders.
Another factor to consider is that each lender has its own preferences regarding the types of business they do and do not want to finance and the minimum size loans they are willing to offer. It’s important to find a lender with preferences that match the type of business you wish to buy. Finally, keep in mind that the quality of the loan officer is critical to a smooth process. This is the person who will quarterback your loan. A good officer can process the applications quickly and efficiently, providing you with a prompt answer regarding loan approval.
Finding your Lender
If you are buying a business, be sure to look for financing as soon as you have a purchase agreement in place for the business. Obtaining SBA financing typically takes a couple of months and is the task that usually takes the longest in the process of closing on the purchase of a business.
The last thing I would tell you is not to put all your eggs in one basket. Contact several SBA lenders to find a loan. Because most of our deals are financed with SBA loans, we know several good SBA lenders in our area that meet the criteria listed above. We can give you contact information for them and help you with the process.