There is a common belief that SBA loans are difficult if not nearly impossible to obtain when buying a business. Being difficult and/or impossible to get is a myth and a harmful one that causes many prospective buyers to not even consider SBA financing. SBA financing is complicated and does require a lot of paperwork, but if you work with an experienced business broker who understands SBA financing and a good bank it goes smoothly.
At Pacific Business Sales we have been doing SBA loans directly with SBA PLP (Preferred Lender Program) banks since 2001 and we have long running relationships with these lenders. We know what the banks require of the buyer and the business, consequently we close well over 90% of the SBA loans we submit with a purchase offer. As the business broker representing a seller, we work closely with the banks when we initially bring a business to market and have the bank review the business for a pre-approval and give us the financing estimates for rates, terms and closing costs.
SBA financing in fact is the best financing available for the purchase of a business. While SBA financing does require a buyer to have good credit and a business with earnings, it is well worth the extra effort as it will allow you to buy a bigger business with a much lower down payment which will allow for greater cash flow and result in much higher Discretionary Earnings from your acquisition.
For sake of a simple comparison and easy math below is an example of a buyer with approximately $150,000 to invest. Considering 3 businesses with different financing terms ranging from an all cash offer to SBA financing, as the buyer has a total of $150,000 to invest we will reserve $25,000 for working capital on the smaller examples and $50,000 for working capital on the larger examples :
Example 1: Cash Offer, No SBA Financing, No Seller Financing
In this example the buyer is making an all cash offer of $125,000 with $25,000 reserved for working capital.
Example 2: 50% Down Payment with 50% Seller Note
In this example the buyer is making an offer with a 50% down payment of $125,000 and a Seller Note of $125,000 (50% of transaction value) at 8% over 60 months (typical Seller Note terms).
Example 3: 10% Buyer Down Payment, 90% SBA financing and No Seller Financing
This is where it gets interesting! By leveraging their down payment the buyer can buy a much larger business with substantially higher earnings. In this example the buyer has a down payment of $100,000, with $50,000 set aside for working capital (an increase of $25,000), and SBA financing for 90% of the transaction value for a total acquisition value of $1,000,000.
Example 4: 10% Buyer Down Payment and a Seller Note of 10% of Transaction Value
In some cases the bank underwriter may require a small seller note with the SBA loan, likewise sometimes the buyer may ask for a seller note as part of their offer. In this example the buyer has a down payment of $100,000, with a seller note of $100,000, and an SBA loan of $800,000.
Example 5: 10% Buyer Down Payment with A/R Financed
Financing the A/R with the purchase of the business is a good deal for the buyer and the seller. The buyer obtains working capital through the purchase and financing of the A/R and the seller increases his cash at closing. Underestimating the required working capital or not even considering working capital until very late in the transaction is a common mistake by buyers. By financing the A/R buyers reduce the working capital they need to bring into the business and preserve their cash. For this example we kept the working capital reserve at $50,000 plus the A/R to keep the down payment the same as example 3 and 4.
As you can see, SBA financing really is advantages and a great deal for buyers and sellers. Sellers get more cash at closing and buyers can leverage their down payment to buy a much larger business increasing their Net After Debt Service Earnings and their Cash on Cash Return (ROE).
Contact us for information on SBA financing with the sale of your business or purchase of a business.