Purchasing an existing business is a smart choice. You can easily access the already established customers, proven operations, and revenue streams as opposed to starting from the ground up. There is always a good amount of consideration given to capital acquisition when it comes to buying a business.
If you are not sitting pretty over cash, do not worry. One of the best ways to finance a business purchase is to borrow a loan to buy a business: a loan from the Small Business Administration (SBA).
It is a good term used in the SBA loan to buy a business, which will probably make this process less difficult and easier on the pockets, especially when it comes to a first-time buyer. This article introduces you to an SBA loan, what it’s about, who qualifies, and how to go about applying for one.
What Makes an SBA Loan Unique When It Comes to Buying a Business?
You will find many interesting features in an SBA loan that are otherwise not available when you compare them to conventional business loans. Because there is insurance from the U.S. government, lenders have been comfortable extending credit to buyers even when they do not have the perfect credit or huge assets. While SBA does not lend money, it guarantees part of the loan, which reduces the lender’s risk.
Thus, many people opt for an SBA loan for the following:
- Down payments are lower, maybe even as low as 10%.
- Longer repayment periods (up to 10 years).
- Interest rates are very competitive.
- Flexibility in financing goodwill and working capital.
What Is an SBA 7(a) Loan?
When most people talk about getting an SBA loan to buy a business, they are generally speaking about the SBA 7(a) loan, the most popular of all their loan programs. Small acquisitions of companies, including ones that are already running, qualify for this loan.
Supported by the SBA 7(a) loan is the following, among many others:
- Buying out an existing commercial entity
- Registration of inventories or assets
- Refinancing business liabilities indebtedness
- Working capital
Who Can Use a Loan to Buy a Business?
The SBA loan is the way for entrepreneurs intending to buy a small- or medium-sized business. Whether you are a first-time buyer or an experienced entrepreneur wanting to enhance your portfolio, this type of loan to buy a business can make it financially attractive.
Eligibility criteria:
- Must be a citizen of the United States or a legal permanent resident.
- Business must be operated in the United States.
- The business must be for-profit and eligible under SBA size standards.
- You must have a sound and feasible plan for business operation and management.
- Usually, good personal credit will be needed, as will some management experience.
How to Get an SBA Loan to Buy a Business
While technically an SBA loan, this type of loan is originated by a bank, credit union, or other lender—in other words, you satisfy both SBA criteria and lender requirements. This is what the lender pays attention to:
Credit Score
Most lenders will want to see a business credit score of 680+. If the score is lower, you may need to find a co-signer or put up additional collateral.
Business Evaluation
The lender will want to ensure that the business being acquired is worth its price tag. They will usually request an independent appraisal to ensure the financial health of the business and its fair market value.
Down Payment
You should expect to pay at least 10-20 percent down of the sales price, and in some instances, the down payment may be shared between you and the seller (by way of seller financing).
Business Finances
You will be required to disclose tax returns (usually three years), P&L statements, and balance sheets. A strong financial framework has an impact on your chances of securing approval.
Business Plan
A credible business plan shows lenders that you understand the industry and have an active approach to building the business.
Securing SBA Financing to Acquire a Business
The whole acquisition process can be time-consuming, but a clear step-by-step approach could smoothen things out:
Finding a lender:
There are various lenders that do not issue SBA loans; thus, you should be looking at SBA preferred lenders who are experienced with business-acquisition financing.
Preparing your documents:
Those would include all of the following:
- Personal and business tax returns (typically three years)
- Business valuation report
- Purchase agreement
- Business plan
- Financial projections
- Personal financial statement
Applications:
You will be properly guided by your lender in making an application for the SBA loan. Be prepared for follow-up questions or requests for further documentation.
Conclusions: Best taken into consideration
If the smartest, most affordable way for you to purchase an existing business is via an SBA loan to buy a business, you are on your way. The SBA loan to buy a business program, from the 7(a) loan, provides easy access to financing with manageable terms to enable you to hit the ground running.
This type of financing, whether you’re acquiring a restaurant, retail store, or service-oriented business, allows you to build upon someone else’s foundation and turn it into something of your own. It pays to do your homework, prepare your documents, and find experienced lenders who can help you realize your entrepreneurial dream.
