SBA Loans in 2019: What Sellers and Buyers Need to Know
The Small Business Administration issues and/or guarantees loans for small businesses, and getting SBA loans is one of the most common way many entrepreneurs fund their dream of owning a small business. The process of qualifying for and getting SBA loans is pretty static, but interest rates, what loans and how many are approved, and who is approving them changes all the time. The reason they are so popular is the low interest rates and fabulous terms. However, that means they are often hard to qualify for.
Here are the things you need to know about SBA loans in 2019 whether you are selling a business or buying one.
Types of SBA Loans
While you may already be familiar with these, it is important to understand the type of loan you are applying for and what that means to you.
- 7(a): The flagship and most common loan, up to $5 million federally guaranteed. The funding can be for working capital, expansion, or the purchase of equipment. Generally issued by banks, credit unions, or specialty lenders.
- 504: These loans are focused on buying land, equipment, or machinery. They can also be up to $5 million, and are generally handled by private sector lenders and non-profits.
- Micro-Loans: These are smaller loans up to $50,000 and are usually handled by community based non-profits.
- Disaster Loans: Up to $2 million for business owners who have been the victims of natural disasters and other emergencies. These are processed directly through the SBA.
The main thing to understand about types of loans is that in most cases, the 7(a) will be the kind of loan that the buyer of a small business will be applying for. It may take some time and effort to qualify for these loans. (See our post on finding a qualified buyer and what that means).
SBA Interest Rates and Repayment Terms
SBA interest rates and payment terms are one of the reasons they are so desirable. Depending on the type of loan, you will have between 7 and 25 years to pay it back, much more time than you would have gotten from a traditional bank business loan.
Interest rates depend on how much you borrow and for how long. A note here: your interest rate is actually different than your APR. The annual percentage rate (APR) includes all loan fees in addition to the interest rate, so it gives you a much brighter picture of what you will actually pay to borrow the money. Your rate will be dependent on the current prime rate, which right now means they vary between a little under 8% to just over 10%.
For a business loan, these terms are excellent and well worth the application effort.
Applying for an SBA Loan
In general SBA loans are easier to get if your finances are in good shape. For a buyer with poor credit or little credit history, it is much less likely they will qualify. This is another reason vetting buyers is so important. However, there are other things to consider as well. First, here is a partial checklist of the documents needed for the application process.
- SBA’s borrower information form
- Statement of personal history
- Personal financial statement
- Personal income tax returns (previous three years)
- Business tax returns (previous three years)
- Business certificate or license
- Business lease
- Loan application history
A complete list can be found on the SBA website. Once you have gathered all of this paperwork, you need to find the right SBA lender. You’ll want to ask several questions, including how many SBA loans they have approved and how often. It also helps to know how experienced they are, and the average dollar amount of the loans they make. That way you know if they even deal in the loan products you are looking for.
Remember, this process takes time. If you are a seller, you will be waiting for the approval just like the buyer. If you are a buyer, it is not a bad idea to have alternatives in mind just in case for some reason you do not end up qualifying for the SBA loan you want.
When is Applying For SBA Loans a Waste of Time?
If your finances are in bad shape or your. business is struggling, applying for an SBA loan may be a waste of your time. Also if the business you are selling or buying is on the ineligible business list, you will not get approved. One of the most common instances currently is the marijuana industry. Illegal activities cannot be funded by SBA loans, and while your state may have legalized recreational sales, since marijuana remains federally illegal, you won’t be able to get an SBA loan.
In fact for any business involved in gambling, recreational marijuana, or any business that could be construed to being involved in illegal activity it is hard to get a legitimate business loan at all. Keep this in mind when you are considering what kind of business to buy, or when selling specific types of businesses.
Remember, applying for an SBA loan is a time consuming process. In most cases, it will take a minimum of 45 days to get funding. Often the wait is much longer. If you know it is unlikely you will qualify, it is often best to look for other sources of funding, or as stated above, have a contingency plan in place.
The 7(a) SBA loan is still the number one favored way to buy a business in 2019. A business broker can help you prepare your business for sale while at the same time helping vet buyers who want to look at your business. Ready to sell? Contact us here at Rogerson Business Services. Ready to buy? Check out our listings of businesses for sale to see if we have the one that is right for you.