SBA Financing is often available for the purchase of a small-midsize business and the real estate associated with it. SBA financing, a loan guaranteed by the U.S. Small Business Administration (SBA) is generally the least expensive way to obtain capital for the acquisition of a business.
When your business is listed we submit the company’s financial statements along with our confidential business profile and recast financials statements for review by our preferred SBA lenders. After they have reviewed our proposed deal structure we receive preliminary approval from the lender which means that the lender will fund the loan, with the proposed terms, to a qualified buyer. We advertise approved businesses as SBA Financing Available along with the low down payment as a result of the SBA financing.
Not all SBA lenders are created equal. Different banks will approve different types of businesses and have different down payment and collateral requirements. We have a network of SBA PLP (Preferred Lender Program) banks and are able to secure a pre-approval for your particular type of business.
The CARES ACT provided 6 months of no loan payments on SBA loans from March 2020 through Sept 2020, no principal or interest due, with those payment forgiven and paid by the SBA.
The new COVID Relief bill passed in December 2020 is reviving that program and offer no payments for 6 months on new SBA 7a Business Acquisition loans funded between February 1st 2021 and September 30th 2021. The 6 months of payments will be made by the SBA. This is essentially paying 6 months of interest and principal on the borrower’s behalf.
Example of Savings:
For example, on a $1 million SBA loan at 5.75% (SBA rate as of December 2020), the monthly payment is $10,976.92 and the buyer would save $54,000 (loan forgiveness is capped at $9,000 per month).
Other SBA updates
SBA 7a loan (business acquisition financing) down payments were reduced to 10% down, with up to 90% SBA financing, effective January 2018.
Also, business acquisition transactions with 51% or more real estate value in the transaction may be financed as if the entire transaction is a real estate purchase with 25 year financing.
The U.S. Small Business Administration (SBA) does not lend to businesses itself but instead guarantees commercial loans made by banks and lenders up to 90%. The SBA provides a guarantee to the bank that loans approved according to SBA guidelines will be repaid, eliminating much of the risk for the lenders and thereby creating a market for small business financing.
What’s involved in qualifying for a SBA loan?
There are two aspects in qualifying for an SBA loan. First and foremost the business itself must qualify. For a business to qualify for SBA financing it must have good financial records, a business valuation that is in line with what the bank’s Valuation Analyst will arrive at (overpriced businesses will not be approved), and a good track record of earnings. The earnings of the company are the key determinant for both value and approval.
The other aspect to qualifying for an SBA loan is the buyer. The buyer must also qualify from a credit standpoint as well as income after debt service. The buyer must have good credit and sufficient down payment (from their own funds) for the purchase. The business must also generate sufficient income, after Debt Service, to meet the buyer’s income needs. If a business generates $90,000 of income after debt service, but the buyer’s income requirements are $150,000 that loan will not be approved, even if the business by itself did qualify.
The Debt Service Coverage Ratio (DSCR) is used by SBA lenders to determine if the business and the buyer will be able to payback the loan. DSCR is.calculated by dividing annual net operating income shown on tax returns by the buyer’s annual loan payments.Usually, SBA lenders prefer a transaction with a DSCR over 1.25.
In order for an SBA Loan to get approved for the sale of your business both the business and the buyer have to qualify. The selling price and the purchase price combined with the net operating income.( Only the income shown on your business’s tax returns will count towards qualifying the business)
The Lender and the SBA requires documentation from the business and the buyer.
Whether you’re selling a business, buying a business, looking for capital to expand your business we can refer you to our network of SBA Lenders. Contact us today 949-200-6350.
Additional Information & Resources