SBA Financing - Selling & Buying a Business | Orange County Business Broker

SBA Financing

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 the 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.

CARES Act & COVID19 Update

The CARES act has a provision where SBA loans made between March 27th 2020 and Sept 27th 2020 qualify for 6 months of loan forgiveness by the SBA. The 6 months of payments will be made by the SBA. This is essentially paying 6 months of interest and principal on the borrowers behalf.

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.

Why is SBA Financing important to business owners who want to sell their business?

  • With a lower down payment the business becomes more accessible to more buyers creating a larger buyer pool.
  • Eliminates the need for a large seller note.
  • If a business qualifies for an SBA loan buyers know that they are purchasing a business with a solid track record and good financial records.

What is an SBA Loan?

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.

  • SBA 7 (a) Business Acquisition loans
  • SBA 504
    • Typically used for acquisition of Real Estate associated with the business.
    • Also used for major fixed asset purchases.
    • Up to 90% financing with fixed rate and 25 year term.

Types of SBA Loans:

  • General Small Business Loans: 7(a)
  • The 7(a) Loan Program is SBA’s most common loan program. The 7(a) Loan Program includes financial help for businesses with special requirements in addition to loans for the purchase of a small business.
  • The SBA will loan the maximum amount of $5 million with the 7(a) Loan Program for businesses that meet the SBA loan qualifications.
  • Microloan Program
  • SBA’s Microloan Program provides small, short-term loans to small business concerns and certain types of not-for-profit child-care centers for start-up and expansion.
  • The Microloan program provides loans up to $50,000
  • Real Estate & Equipment Loans: CDC/504
  • The CDC/504 Loan Program provides financing for major fixed assets such as equipment or real estate. Buyers can combine the 7(a) financing with the 504 loan when purchasing the business and Real Estate for better financing terms.
  • The SBA will provide a 504 loan according to the value of the Collateral taking into consideration DSCR (Debt Service Coverage Ratio)
Summary
SBA Financing for Buying a Business-Acquisition
Article Name
SBA Financing for Buying a Business-Acquisition
Description
The SBA loan for buying a business is a SBA 7a loan. These 10 year loans at a maximum rate of Prime Rate + 2.75% with a minimum down payment of 10% for qualifying transactions. In some cases you may be able to obtain slightly lower rates than Prime + 2.75% depending on the transaction and your credit. Some banks require more than 10% down, this also depends on the transaction and your credit. If the purchase includes real estate that is valued at 51% or more of the transaction the loan will be treated as if the entire loan is for real estate with 25 year financing. SBA financing is the best financing available for small-mid size business buyers and sellers. For Buyers it provides 10 financing at low interest rates and for Sellers it delivers cash at closing instead of carrying a large Seller Note (Seller Financing).
Author
Publisher Name
Pacific Business Sales - Orange County Business Broker
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More About SBA Loans

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)

Documents Needed for a SBA Loan

The Lender and the SBA requires documentation from the business and the buyer.

Business documentation requirements include but are not limited to the following:

  • 3 years Income Tax Returns
  • 3 Years of Financial Statements: (Profit and Loss Statements and Balance Sheets)
  • Current Year to Date P&L and Balance Sheet
  • 1 year of Bank Statements
  • .Legal Documents
    • Business licenses and registrations
    • Articles of Incorporation
    • Copies of contracts you have with any third parties
    • Franchise agreements
    • Commercial leases
  • 504 Loan Documentation for Real Estate will also be required.

Buyer’s documentation requirements include but are not limited to the following:

  • Personal Financial Statement (on SBA or bank’s form)
  • 3 years Income Tax Returns
  • 1 year of Bank Statements
  • Personal Background – resume
  • Related management or business experience to the business being purchased
  • Business Plan
  • Personal Credit Report
  • Collateral of personal or business property that will be used to secure a loan. (full collateralization is not always required)

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.

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Additional Information & Resources

How to get an SBA Loan to Buy a Business 

SBA Loans; More Cash at Closing for Sellers & Better Financing for Buyers

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