SBA loan business seller benefits

The SBA loan program is essentially a program to encourage and assist new entrepreneurs.  It does this by providing access to capital to buy or start a business. For business sellers, though, it provides some great benefits.  These include:

1. A process that requires a potential buyer of your business to meet certain standards to be approved for finance for an SBA loan. This saves the seller wasting time working with unqualified buyers.
2. The SBA loan application process does do not require too much initial work or time by the seller. This allows the seller to focus on owning and operating their business.
3. The SBA loan process does not cost the seller any money. There are fees to pay if the loan is approved but they are the responsibility of the buyer or borrower.
4. If a buyer is able to qualify for an SBA loan, the seller will get paid up front for most of the purchase price.

Who is the SBA?

The SBA or Small Business Administration was an Act of Congress that saw it come to life in 1953.  Its success is assisting millions of loans, loan guarantees, contracts, counselling to business owners and buyers and more.

Part of its charter is to provide assistance to small businesses with access to capital or business financing, education, information and technical assistance training and assistance with government contracting (help to small businesses with federal procurement.)

READ MORE: Here is more information about the steps to sell a business.

Does my business qualify for an SBA loan?

If you are planning to sell your business or franchise there is great value to in getting an SBA loan pre-qualification letter. One of the steps I help as your business broker is to check with SBA lenders to see if they would issue a Prequalification Letter.

A Prequalification Letter does not mean your business is approved for an SBA loan.  It does mean, however, that when a buyer inquires about buying your business AND you have an SBA Prequalification letter (because the SBA lender has seen your business financial statements and more) your chances of selling your business are now higher.  The the buyer needs to have the necessary requirements to get an SBA loan.  However, with both element in place the speed to close the sale of the business is much higher as the buyer, lender and seller now work together and spend time on the transaction so it closes.

A lot of buyer and seller transactions simply die due to buyer and seller fatigue. Having a business pre-qualified for a loan removes a large obstacle and will encourage other third parties such as a landlord, attorneys and accountants to keep spending time on the deal.

READ MORE: Here is more information about tax and selling a business.

FAQ for SBA loan business sellers

Here are some common Frequently Asked Questions or FAQ’s I’ve received over the years from business or franchise owners asking how the SBA program helps them sell. If you have questions or need more information, you are welcome to email me at info@RogersonBusinessServices.com. Otherwise, give me a call on (916) 570-2674. If your question is not here, email it to me and I will respond as soon as I can.

Does it matter which bank, credit union or financial institution is used?

Different lenders have different criteria for approving an SBA loan. The management skills and creditworthiness of the buyer are critical.  For the  the seller, the lender wants to know the industry your business is in and they want to review your financial statements including tax returns, Profit and Loss and Balance Sheet to determine, in the first instance, if they would be willing to offer a loan.

Does the loan process vary with each lender?

Each lender has their own SBA loan process. The smaller banks and lenders have a manager and underwriter that 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 main loan programs. The first is the 7(A) loan program to buy a business or franchise. The 504 loan program is to buy commercial real estate including buildings and related commercial property.

Do the lenders loan to all types of businesses?

Lending criteria changes all the time. Lending includes:

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

What collateral does each lender need?

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.

If I take a Seller note, which security position do I get?

Because the lender will take a first security interest in all business assets, the sellers note will be in second position.

What is a typical deal structure?

If the loan is for a business acquisition, the maximum loan amount is $5,000,000 with the average down payment of 20%. This down-payment can come from a combination of both the buyer down-payment and the seller being willing to carry a Sellers note on the balance.

If the loan is for commercial real estate, the maximum loan amount is $5 million with the borrower bringing a down payment of 10% to 15% and the maximum term of the loan of 25 years.

What other criteria are important to get a loan approved?

This is not a complete list but the following criteria are important and will be considered by your SBA lender.

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

Questions or more information?

If you have questions or would like to see if your business would be able to get an SBA loan Prequalification letter, you are welcome to email me at info@RogersonBusinessServices.com. Otherwise, give me a call on (916) 570-2674.