How to Approach Buying a Business With an SBA Loan: The Complete Guide
Using an SBA loan to buy a business is an incredibly sound investment strategy for any acquisition entrepreneur looking to become their own boss.
Established in 1953, the Small Business Administration provides assistance to small businesses in the U.S.
One of the main ways they do this is by providing SBA loans, which can be used to purchase an existing business. It can also be used to expand and grow your business.
It is a terrific tool to use for any aspiring acquisition entrepreneur.
How can an SBA loan help you buy a business?
The SBA doesn’t actually loan money itself, it merely guarantees loans between acquisition entrepreneurs and traditional lending institutions. You make loan repayments directly to the bank, for example.
Let’s say the SBA guarantees 85 percent of your loan. If you default, the SBA will cover that percentage of the loan.
This significantly reduces the amount of risk taken by the bank, thereby opening up financing to many acquisition entrepreneurs, or AEs, who might be unable to finance the purchase on their own – whether that’s because the business is too small or new or perhaps the AE doesn’t have the best credit.
Some of the pros of SBA loans include:
- You’ll often get longer repayment terms with an SBA loan, meaning smaller payments which can be extremely helpful while you seek to grow your newly purchased business.
- You can often put a smaller down payment for SBA loans relative to the financing you’d get going directly to a bank.
- SBA loans are very adaptable and can range from $500 to over $5 million so they can be used to cover any number of business expenses.
When should you use an SBA loan and what are the differences?
You can use an SBA loan for any number of business purposes from renovating your current facility to refinancing debt to purchasing a new business.
Let’s take a look at some of the SBA loan types.
This is the most popular type of SBA loan and is used for several business needs, including:
- Purchase or expand a business
- Repair existing capital
- Refinance debt
- Purchase furniture, fixtures, supplies, or machinery
A 7(a) loan can range from $30,000 to $5 million. Business owners should have good credit and business history to qualify.
Repayment terms usually don’t go past 10 years for most loans and 25 years for real estate loans. In general, the SBA asks for 10% down on 7(a) loans.
The 504 programs (Certified Development Company) are aimed at entrepreneurs looking to expand their existing businesses.
It can be used to:
- Purchase land or existing buildings
- Purchase long-term equipment
- Build new facilities
- Renovate or convert existing facilities
You can get up to $5 million under the CDC/504 SBA program. The SBA usually asks for 10% down on CDC/504 loans.
Businesses cannot be worth more than $15 million and they must have an average net income of $5 million or less after taxes over the previous two years.
- SBA Express
SBA Express loans have a much faster turnaround time than 7(a) loans but offer much less financing. They have a 36-hour approval time although it can take up to 90 days to receive the funding.
They cap out at $350,000 and are good for purchasing a smaller business or if you simply need a line of credit.
The term ranges from 5 years for a line of credit or 25 years for real estate.
This is a great program if you’re looking to start or expand your business. You can get up to $50,000 but the average MicroLoan is around $13,000.
You can use these loans for:
- Working capital
- Inventory or supplies
- Furniture and fixtures
- Machines and equipment
You cannot use these loans to pay off debt or to purchase real estate. The maximum term is six years.
How to apply for and manage the process of getting an SBA loan?
There are lots and lots of lenders who offer SBA loans, including traditional banks and several online-only institutions. It’s best to check with your local SBA office.
You can also use the SBA Lender Match which promises to connect you with a lender in two days once you have provided your contact info, a description of your business, and what you are looking for from a loan.
In general, getting approved for an SBA loan can take at least a month, and sometimes many months.
You’ll want to have a lot of personal and financial information on hand including, personal and business tax returns for up the three years prior, a copy of your business certificate or license, and a history of previous loan applications.
What happens next after approval?
When you receive approval ultimately depends on what sort of loan you’re applying for, but generally takes between 60 and 120 days.
Next, you should work with the lending institution to finalize repayment terms and interest rates before signing the loan agreement and, ultimately, receiving the funds.
It is highly recommended that you have a plan in place prior to receiving the money so you know how you’re going to spend it.
This will make it much easier to keep track of your finances, use the funds for the right goal and achieve your business targets.
SBA loans are an incredibly helpful tool for anyone looking to purchase an existing business or expand their existing operations.
You can often get more favorable repayment terms than with a traditional lending institution, opening up your options to include buying a larger business than you might otherwise think.
Review the information in this article to see which loan is right for you and get started on an SBA loan.