As our country continues its economic recovery, the number of businesses for sale is growing. Many aging business owners are looking to get their retirement plans back on track. When you factor in low interest rates and current SBA loan incentives, this is a great time to buy a business. These loan incentives can save buyers thousands of dollars, but are only available to those who close on a business through the end of September, so you must act quickly if you want to take advantage of them. For those who are not familiar with the process, here is a handy guide for securing an SBA loan to make that investment.
How SBA Loans Work
The SBA does not directly provide loans to small businesses. They work with SBA-approved private lenders and provide loan guarantees to reduce lenders’ risk. To get loan guarantees, both the lender and the borrower must follow certain guidelines. One of the incentives the SBA is currently offering is to increase their loan guarantee from 80-90%. Their willingness to take on more risk means less risk for banks, who will in turn be more willing to lend. For this reason, it will be easier to obtain a loan and you will have more lender options if you close before September 30, 2021. The SBA is also offering to pay the borrower’s principal and interest payments for the first 3 months. This is another significant saving that could make it easier and cheaper for a purchaser to obtain a loan.
SBA 7(a) Loan Requirements
The most common SBA loan is the 7(a) loan program, which can be used to purchase or expand an existing business. The maximum amount of a 7(a) loan is $5 million and is dependent on the company’s profit, credit history and numerous other factors.
For SBA 7(a) loan, the eligibility requirements are as follows:
- the business must be for-profit
- the business must be in the U.S.
- the buyer must have acceptable credit based on both personal and previous business credit histories
- the buyer must provide an equity injection (down payment), usually 10% of the loan amount
- the buyer must not be able to get a comparable loan from another lender on reasonable terms
- the business must not be over the SBA size limit for its industry (this is usually based on number of employees and financial history)
Anyone who meets these requirements can obtain a 7(a) loan. If business is doing well and your personal finances are in good shape, your chances of being approved are much higher. To apply for a 7(a) loan, start working with an SBA approved lender, who will coordinate with the SBA. Before you start working with a lender, try to get a clear idea of what type of business you would like to purchase. This will help determine how much you need to borrow, for how long and the repayment terms.
Before completing a loan application. It’s a good idea to have as much documentation ready as possible for when your lender asks. This will help expedite the application process and get you approved faster. Here are the documents you will need to supply:
- Statement of personal history (SBA Form 912)
- Personal financial statement (SBA Form 413)
- Personal income tax returns (previous 3 years)
- Personal resumes for each principal
- Business tax returns (previous 3 years) of the business to be purchased
- Proposed Bill of Sale including Terms of Sale
- Asking price with schedule of inventory, machinery and equipment, furniture and fixtures
- Copy of the business lease
If you have an existing relationship with an SBA approved lender, such as a commercial bank, contact them first to see if they can help you apply for a loan. If you don’t already have a lender, you can use this tool on the SBA website to find a lender.
Most SBA lenders require a down payment of at least 10%. This is the requirement to get the most favorable loan terms. There are ways to purchase a business with less than 10% down. You can finance with only 5% if the seller of the business agrees to hold a note for the other 5%, since SBA allows the seller to cover half of the down payment. It is also possible to get 100% financing if you are purchasing another business as an expansion of another one you already own.
Funds for a down payment can be from a variety of sources. This includes cash on hand, borrowed funds, investors, gifts, retirement account rollovers, or equity in another business or personal property.
Terms, Rates and Fees
The length of an SBA loan term depends on the type and purpose of the loan. Most loans last up to 25 years for commercial real estate, 10 years for equipment and other fixed assets or 10 years for working capital or inventory. Both fixed and variable rates are available through the 7(a) program, with rates as low as prime plus 2.25%, depending on the amount borrowed. While the rates are set by individual lenders, they cannot exceed the limits set by the SBA.
The SBA typically charges guaranty fees on 7(a) loans, but as part of their current incentives, they are waiving these fees. This offers a significant savings to buyers that could amount to tens of thousands of dollars, depending on the purchase price. There are prepayment penalties, but only on loan terms of more than 15 years, and only if they are paid off within the first 3 years.
The SBA isn’t designed to be the first stop for financing, but with borrowing being made easier this year, it is a great time to take advantage. There are a lot of existing, proven businesses for sale in Southwest Florida. If you are in the market for one, check out our list of SBA lender pre-qualified businesses available right now. Contact us and we can help match you with a business in your desired industry that meets your budget and investment goals.
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