|All content presented here and elsewhere is solely intended for informational purposes only. The reader is required to seek professional counsel before beginning any legal or financial endeavor.|
When it comes to acquiring an existing business, small business owners often face a significant hurdle: financing. That’s why many borrowers turn to the U.S. Small Business Administration (SBA), more specifically, the SBA loan program. These loans provide a lifeline of financial support to aspiring entrepreneurs, empowering them to realize their business dreams. SBA loans are specifically designed to assist small business owners in various financial endeavors, including the acquisition of an established business. These loans are backed by the federal government, which helps reduce the risk for lenders and makes them more attractive to borrowers.
- SBA loans provide attractive financing options for small business owners looking to acquire a business, offering favorable terms and low-interest rates.
- Various SBA loan types, such as 7(a) and 504 loans, can be used for business acquisitions.
- SBA loans can be used to acquire a wide range of businesses, including existing businesses, franchises, and even commercial real estate properties.
- SBA loans have strict eligibility requirements, hefty documentation requirements, and long approval processes.
Understanding SBA Loans for Business Acquisition
Since its inception, SBA loans have been popular with small and larger businesses alike. They offer unbeatable terms if you qualify, and long loan terms for those with big business dreams.
What Type of SBA Loan Can Be Used to Acquire a Business?
The U.S. Small Business Administration (SBA) offers several loan programs that entrepreneurs can utilize. The two primary types of SBA loans used specifically for business acquisitions are the SBA 7(a) Loan and the SBA 504 Loan. Here's a breakdown of each loan type:
SBA 7(a) Loan:
- This is the most popular SBA loan program and provides flexible financing options for small business owners.
- The maximum loan amount is $5 million, and SBA acquisition loan terms can extend up to 25 years, depending on the purpose of the loan.
- Interest rates are typically competitive, ensuring affordable borrowing costs.
- The SBA 7(a) acquisition loan requires collateral, such as business assets or personal guarantees from the borrower.
SBA 504 Loan:
- This loan program is specifically designed for real estate and equipment financing.
- It can also be utilized for the acquisition of a business that involves substantial real estate or equipment assets.
- The loan structure involves a partnership between a Certified Development Company (CDC), a lender, and the borrower.
- The maximum loan amount can reach up to $5.5 million, depending on the project's size.
- The SBA 504 loan provides long-term fixed-rate financing with low down payment requirements.
What Kinds of Businesses Can Be Purchased with an SBA Loan?
While specific SBA business acquisition loan requirements may vary, SBA loans can generally be used to purchase a wide range of businesses. Here are some examples:
- Existing businesses
- Retail stores
- Restaurants and food services
- Professional practices including medical and dental offices, accounting firms, etc.
- Service businesses such as hospitality, consulting, marketing, etc.
Who Can Use an SBA Business Acquisition Loan?
For the most part, the SBA leaves certain requirements up to the lenders it works with. That said, there are a few key factors that determine who can use an SBA business acquisition loan:
- SBA loans are primarily intended for small business owners. The SBA defines small businesses based on industry-specific size standards, which consider factors such as the number of employees or average annual revenue.
- Borrowers must be U.S. citizens or legal residents to qualify for an SBA business acquisition loan.
- SBA lenders typically require borrowers to have a good credit history, demonstrating a responsible financial track record.
- Some loan programs or lenders may have industry-specific eligibility criteria. Certain industries may require additional certifications, licenses, or compliance with specific regulations, depending on the business you’re acquiring.
- Borrowers should be prepared to make a down payment towards the business acquisition. The specific down payment percentage will be different depending on the loan program, lender, and nature of the business being acquired.
How Long Does It Take to Get an SBA Business Acquisition Loan
Typically, the process involves multiple stages, including application submission, lender review, underwriting, and loan closing. On average, it can take anywhere from several weeks to a few months to complete the entire process and receive the funds.
The duration you have to wait specifically is influenced by factors such as the complexity of the acquisition, your responsiveness in providing required documentation, the lender's workload, and any potential delays in SBA review and approval.
Example Scenario for SBA Business Acquisition Loan
Let’s take a look at a real-life example of a potential business acquisition and the loan necessary to make it happen.
Sarah, an aspiring entrepreneur, dreams of owning her own restaurant. But understandably, the work necessary to start from the ground up is too overwhelming. Instead, she discovers a well-established, profitable restaurant in her neighborhood is up for sale. However, Sarah lacks the necessary capital to acquire the business outright. To make her dream a reality, she decides to explore an SBA business acquisition loan.
Sarah begins by researching SBA loan programs and finds that the 7(a) loan program is more suitable for her needs. She contacts an SBA-approved lender and starts the application process. After a few weeks of gathering the necessary documents (and working with a lawyer and/or business broker to do so), Sarah submits the necessary documents, including her business plan, financial statements, and details about the restaurant's operations.
The lender evaluates Sarah's application, considering factors such as her creditworthiness (it’s in the excellent range), experience in the industry (she has a culinary degree), and the viability of the restaurant (it’s been a staple in the community for years). Impressed by her thorough business plan, strong credit history, and the restaurant's track record, the lender approves Sarah's loan application.
With the SBA loan, Sarah can now proceed with the acquisition! She uses the loan funds to purchase the restaurant, including its assets and inventory. With the business in her hands, Sarah begins implementing her ideas for growth and improvement.
Pros and Cons of Using an SBA Loan for Acquisition of a Business
SBA loans have many great features that make them sought-after loans, but as with most good things, there are a few negatives to balance it out.
Pros of SBA Business Acquisition Loans
- Favorable terms and rates: SBA loans generally come with more favorable terms compared to traditional bank loans because they’re designed with business owners in mind. They often feature lower down payments, longer repayment terms, and competitive interest rates.
- Access to a lot of cash: SBA loans provide access to substantial capital that may be challenging to obtain through other financing options.
- Reduced risk for lenders: The SBA acts as a guarantor for approved loans (rather than the borrower), mitigating the risk for lenders. This guarantee assures lenders that they’ll be repaid even if the borrower is unable to fulfill the loan obligations.
- Flexibility in use: Borrowers can utilize the loan proceeds for various purposes related to the acquisition, such as financing the purchase price, covering working capital needs during the transition, or investing in necessary improvements or equipment.
- Additional support and resources: Beyond financing, the SBA offers a wealth of resources and support. It provides counseling, educational programs, and mentorship opportunities.
Cons of SBA Business Acquisition Loans
- Lengthy approval process: The approval process for SBA loans isn’t going to be nearly as fast as through say a personal loan lender. The SBA requires comprehensive documentation, a lengthy lender review, a separate SBA evaluation, and underwriting stages, all of which result in a longer timeline before you ever hear about your approval.
- Limited loan options for startups: SBA loans are typically designed to support the acquisition of existing businesses. Startups or businesses with a limited operating history may face difficulty qualifying for an SBA acquisition loan due to the requirement of a proven financial track record.
- Potentially longer repayment terms: While longer repayment terms can be beneficial in terms of lower monthly payments, this also means you’ll be stuck paying off the debt for a lot longer than you perhaps should.
How to Get an SBA Loan for the Acquisition of a Business
Securing an SBA loan for the acquisition of a business involves a structured process that requires careful planning, preparation, and a lot of paperwork. Here are the key steps to follow when seeking an SBA loan:
- Determine your eligibility: Assess your eligibility for an SBA loan by reviewing the SBA's size standards.
- Prepare all the necessary documentation: Gather the required documentation to support your loan application You can find a list below).
- Research and select an SBA-approved lender: Identify lenders approved by the SBA to originate and service loans. Here’s our list of our favorite SBA lenders.
- Submit your application: Complete the loan application provided by the lender, including detailed information about the business you intend to acquire, your financial situation, and your business experience.
- Await your lender review and SBA approval: The lender will review your application and supporting documents to assess your creditworthiness, repayment ability, and the viability of the business acquisition you’ve selected. If the lender determines your application is suitable, it’ll submit it to the SBA for approval.
- Complete the underwriting and closing process: Once the SBA approves your loan application, the lender will proceed with underwriting, which involves verifying information, conducting appraisals if necessary, and finalizing your loan terms. After underwriting is complete, you’ll proceed to the loan closing.
Documentation Required for an SBA Business Acquisition Loan
Obtaining an SBA business acquisition loan requires providing comprehensive documentation to show your financial responsibility and the viability of the business you’re considering buying into. Here are the common documents typically required for an SBA business acquisition loan:
- Prepare personal financial statements, including details of assets, liabilities, and personal income.
- Provide financial statements for the business being acquired, such as balance sheets, income statements, and cash flow statements.
- Submit personal and business tax returns for the past few years.
- Develop a comprehensive business plan outlining your vision, objectives, market analysis, financial projections, and strategies for operating and growing the acquired business.
- Include a copy of the purchase agreement or letter of intent detailing the terms and conditions of the business acquisition.
- Provide resumes or professional biographies for the key individuals involved in the acquisition, including yourself and your management team.
- Submit legal and entity documents related to the business being acquired. This may include articles of incorporation, partnership agreements, operating agreements, and any licenses or permits required.
- If collateral is required to secure the loan, provide documentation related to the collateral, such as property deeds, vehicle titles, or equipment appraisals.
Additional Tips for SBA Business Acquisition Loans
Navigating the acquisition loan process won’t necessarily be as easy as other loan processes, but the financial outcome is often more than worth it. Here are a few tips to help you get through the process smoothly:
- Leverage the expertise of SBA resource partners, such as Small Business Development Centers (SBDCs) or SCORE mentors. These organizations provide valuable guidance, educational programs, and counseling services to help you navigate the loan application process and improve your chances of success.
- Understand how much you’re getting in financing: One major note entrepreneurs need to understand is that the SBA often won’t provide 100% of the amount you need to make a purchase. With SBA 7(a) loans, for example, the SBA only guarantees up to 85%
- Prioritize maintaining a good personal and business credit history. Pay bills on time, manage existing debts responsibly, and address any credit issues proactively.
- Consider consulting with professionals, such as accountants, attorneys, or business brokers, who specialize in business acquisitions. Their expertise can help you navigate complex legal and financial aspects of the acquisition.
- Be responsive and proactive. Proactively communicate with the lender, seeking clarification when needed and providing updates on the acquisition progress. Maintaining open lines of communication demonstrates your commitment and professionalism.
Business Acquisition Financing Alternatives
While SBA business acquisition loans offer an attractive financing option, its strict requirements and long wait times won’t work for everyone. Here are some alternatives to explore:
- Private investors: Seek out private investors, angel investors, or venture capitalists who may be interested in funding your business acquisition. These investors provide capital in exchange for an ownership stake or a return on their investment, so make sure that arrangement is comfortable for you.
- Crowdfunding: Crowdfunding platforms enable entrepreneurs to raise funds from a large number of individuals who contribute smaller amounts. This approach can be effective for acquiring capital from a broad audience who believe in your business vision. Companies big and small rely on these campaigns.
- Small Business Investment Companies (SBICs): SBICs are private investment firms licensed by the SBA. They provide financing to small businesses, including those involved in acquisitions. SBICs offer both debt and equity financing, and their investment decisions are based on the growth potential and profitability of the business, rather than solely on your credit profile.
- Equipment financing: If the business acquisition involves significant equipment or machinery, explore equipment financing options. This approach may provide more streamlined approval processes and specialized terms for equipment acquisition.
- Personal savings or family and friends: Consider utilizing personal savings or approaching family and friends for financial support. While these options may involve personal relationships and potential risks, they can offer flexibility in terms and repayment arrangements.
- Grants and incentives: Research grants and incentives available for specific industries or business acquisitions. Government agencies, industry associations, and economic development organizations often provide grants or funding programs to promote business growth and job creation