SBA loan benefits to a buyer

The SBA, or Small Business Administration, is a Federal government agency responsible for overseeing and administering the loans of banks and lenders that wish to approve and provide financing to authorize and process these SBA loans.

It offers significant benefits if you want to buy a business or a franchise. These include:

1. Small business loans are available to help a business buyer finance the purchase of an existing business with positive cash flow and a track record of success.
2. An SBA lender requires a business or franchise buyer to bring a down payment to have “skin in the game. ” However, the buyer can leverage this down payment to get a loan, which allows them to buy a business at a higher value and with a higher cash flow.
3. Borrowers incur costs when getting an SBA loan. Under most circumstances, the borrower can roll these costs into the loan.
4. Suppose a buyer can qualify for an SBA loan. In that case, they can negotiate more aggressively with the seller by offering most, if not all, of the purchase price upfront, thereby reducing the seller’s risk of nonpayment.

Who is the SBA?

The SBA, or Small Business Administration, was established by an Act of Congress in 1953. Since then, it has delivered millions of loans, loan guarantees, contracts, business owner and buyer counseling, and more. Part of its charter is to help small businesses with access to capital or business financing, education, information, technical help and training, and assistance with government contracting (helping small businesses with federal procurement).

How do I know if I qualify for an SBA loan?

If you plan to buy a business or a franchise, there is significant value in determining whether you qualify for an SBA loan. One of the steps I help with as your business broker is to understand the business or franchise you would like to buy, then introduce you to a few SBA lenders to see if they would be willing to give you a Prequalification Letter, all for free. A Prequalification Letter does not mean you are approved for an SBA loan. This means that when you present an offer to buy a business or franchise with your Prequalification letter and another buyer does not, your chances of the seller accepting your offer are greater.

What are the four steps to qualify for a loan?

There are four steps to qualifying for a loan. Being pre-qualified does not mean your loan is approved. It means an SBA lender has reviewed your financial history and written a prequalification letter to support any business offer you make. You will now be able to negotiate with the seller from a better position and have a much greater chance of closing the deal and becoming a business owner.

The four steps to take are as follows:

1. Complete a Personal Financial Statement. Click this link if you would like to download a sample SBA Personal Financial Statement.
2. Review your credit. Different lenders have different processes. Some lenders will allow you to download and provide your credit report. These lenders understand that having a lot of activity on your credit report is not good so that they will work with you. Other lenders wish to get your authorization to run the report themselves.
3. Provide a current bank statement showing you have the down payment available.
4. Provide a current copy of your resume. This step is critical if you plan to get an SBA loan because the lender wants to see that you have experience in the industry of the business you are buying. Additionally, if you have management experience, detail this clearly, including the job description, how many direct employees were reporting to you, and over what period of time. The number one reason SBA borrowers are not successful is that they don’t have business management experience.

FAQ for SBA loan business buyer benefits

Here are some common Frequently Asked Questions (FAQs) from borrowers who have worked with me to buy an SBA loan for a business or franchise over the years. If you have questions, need more information, or are looking for an SBA loan, you are welcome to email me at info@RogersonBusinessServices.com. Otherwise, give me a call at (916) 570-2674. If your question is not here, email me and I will respond as soon as possible.

Where do I apply for an SBA loan?

An SBA loan is not something you apply for approval from the SBA. That is, the SBA is a government agency.  Its responsibility is to develop, write, and oversee the rules for SBA loan programs. These rules are incredibly detailed.  Additionally, the SBA reports to the US Congress, which annually approves how much money it will provide to guarantee loans made by banks that underwrite and approve them.  As a borrower, you will apply your SBA loan application to a bank, credit union, or financial institution with approval to process an SBA loan application.

Does it matter which bank, credit union, or financial institution I apply with?

First, ask your bank, credit union, or financial institution if they process and handle SBA loans. If their answer is yes, your second question is whether they are a PLP or part of the Preferred Lender Program. A PLP lender has the SBA’s authority to process its loan applications internally. If the lender is not a PLP, they must take your application and then send it to the SBA or one of its Regional offices for processing. This will then slow down the loan approval process.

Does the loan process vary from lender to lender?

Each lender has its own SBA loan process. Smaller banks and lenders have a manager and an underwriter who handle the entire process. Mid-size lenders may have a local loan committee, while large banks have a more formal approval process that can slow down the application, processing, and eventual approval.

Does each financial institution have a lending limit?

The SBA has two primary loan programs: the 7(A) loan program for buying a business or franchise and the 504 loan program for buying commercial real estate, including buildings and related property.

Does the number of loans issued vary across banks?

A good question to ask an SBA lender is how many loans they have approved. A small loan approval number may show they are a conservative lender, and it may be hard to get an SBA loan approved.

Do the lenders loan to all types of businesses?

Lending criteria change all the time, so don’t be afraid to ask so you get the latest information. Lending includes:

• Retail and service businesses with sales (3-year average) not exceeding $6 million to $20 million, depending on the industry
• Wholesalers and manufacturers with employees up to 100 and 500, respectively, regardless of sales volume

Does the lender need my credit score?

Almost without exception, an SBA lender will want to see your credit score, credit history, proof of downpayment, the source of the downpayment, and your business management experience. Getting approval for your loan application may be difficult if they are uncomfortable with one or more of these criteria.

What collateral does each lender need?

Once again, almost without exception, the lender will take a first security interest in all business assets (excluding titled vehicles) plus personal assets (including residences) as collateral.

Do the financial institutions have access to other types of capital?

If the SBA loan helps you succeed and grow your business, you may need more funds to continue that growth. The SBA loan program will probably not be an option, but having a solid loan history will lead to introductions to venture capitalists, mezzanine lenders, and possibly Angel investors.

Do I need to do all my banking with the lender, including daily or weekly deposits from my business?

Some SBA lenders are happy to process and approve the SBA loan application. If the loan is approved, some lenders will require that the business’s operating deposits be made with the bank.

What is the status of your Life Insurance?

One detail that too many SBA loan applicants leave to the last minute is Life Insurance. As you borrow money to own and operate your business, the SBA lender must protect that loan, so they ask that their name be part of your Life Insurance policy. If you don’t have Life Insurance, you must address that problem, or they will withhold your loan approval.

What other criteria are essential to get a loan approved?

This is not a complete list of loan approval criteria; the following criteria are essential and will be considered by your SBA lender.

• The business must have adequate historical cash flow to cover the proposed loan amount.
• The business’s debt-to-net worth ratio must meet industry averages.
• The borrower(s) must be actively involved in the day-to-day operation of the business.
• Satisfactory personal credit histories are required for all principals and guarantors.
• No past bankruptcies or felony arrests.

Want to learn if you would qualify for an SBA loan?

Click here to learn more about applying for an SBA loan.

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