SBA loan benefits to a seller

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.

Don’t Let Money Be a Roadblock to Your Dreams!

Benefits of an SBA loan to a seller

For business sellers, though, it gives 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 from wasting time working with unqualified buyers.
  2. The SBA loan application process does 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 money.  If the loan is approved, the buyer or borrower is responsible for the fees.
  4. If a buyer qualifies for an SBA loan, the seller will receive most of the purchase price at the close of the sale.

 

Who is the SBA?

The SBA, or Small Business Administration, was created in 1953 by an Act of Congress.  Its success has included assisting millions of loans, guaranteeing loans, negotiating contracts, counseling business owners and buyers, and more.

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

READ MOREHere is more information about selling a business.

Does my business qualify for an SBA loan?

If you plan to sell your business or franchise, obtaining an SBA loan prequalification letter is highly recommended. As your business broker, I will help you check with SBA lenders to see if they will issue one.

A Prequalification Letter does not mean your business is approved for an SBA loan.  This means 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 higher.  The buyer needs to have the necessary requirements to get an SBA loan.  However, with both elements 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.

Many buyer-seller transactions simply die due to buyer-seller fatigue.  Having a business pre-qualified for a loan removes this obstacle and encourages other third parties, such as landlords, attorneys, and accountants, to continue working on the deal.

READ MOREHere is more information about tax and selling a business.

FAQ for SBA loan business sellers

Here are some common Frequently Asked Questions (FAQs) 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 at (916) 570-2674.  If your question is not here, email it to me, and I will respond as soon as possible.

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

Different lenders have different criteria for approving an SBA loan.  The buyer’s management skills and creditworthiness are critical.  For the seller, the lender wants to know the industry your business is in.  They also want to review your financial statements, including tax returns, Profit and Loss statements, and Balance Sheets, 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 its own SBA loan process.  Smaller banks and lenders have a manager and 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.

Do the lenders loan to all types of businesses?

Lending criteria change 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 seller’s 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 an average down payment of 20%.  This down payment can be a combination of the buyer’s down payment and the seller’s willingness to carry a seller’s note on the balance.

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

What other criteria are essential to get a loan approved?

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

  1. The business must have adequate historic cash flow to cover the proposed loan amount.
  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.

 

Want to learn if your business would qualify for an SBA loan?

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

Andre Rogerson from Rogerson Business Services
Rogerson Business Services is a business brokerage service based in California.

About Us

Rogerson Business Services is a business brokerage service based in California.

If you are ready to sell your California business, let us know your questions.  Whether you are selling a medical practice, an HVAC business, a landscaping business, or any other business with gross revenue greater than $2 million, contact us today to learn about our successfully selling your business program.

We’re happy to talk with you about the process of selling your business. Give us a call or contact us when you are ready.

Contact Us

Gallery