How to Buy a Business With an SBA Loan

What is an SBA loan?

First things first, let’s define what an SBA loan is. The SBA offers various loan programs to help small businesses, including those looking to purchase existing businesses. These loans are partially guaranteed by the government, making it less risky for lenders to provide financing.

There are different types of SBA loans that can be used for buying a business, such as the 7(a) loan and the 504 loan. These loans have different eligibility requirements, interest rates, and terms, so it’s important to research and understand which one is right for your specific situation.

SBA 7(a) loan

The SBA 7(a) loan is arguably the most popular SBA loan option, primarily due to its versatility. You can use it for a broad range of business purposes, including buying an existing business. The SBA guarantees up to 85% of loans under $150,000, and 75% of loans greater than $150,000. The maximum loan amount is $5 million, although the average loan size is typically much smaller. Interest rates on 7(a) loans are typically close to prime rates and are influenced by a variety of factors, including the length of the loan and whether the rate is fixed or variable.

SBA 504 loan

The SBA 504 loan is designed specifically for business expansion and major fixed-asset purchases, such as real estate or equipment. Unlike the 7(a) loan, the 504 loan involves a Certified Development Company (CDC)—a nonprofit corporation promoting economic development. Under the 504 loan program, a business owner will put down a minimum of 10%, a conventional lender (like a bank) will finance up to 50%, and the CDC will finance the remaining 40%. The maximum loan amount from the CDC is $5 million (or $5.5 million for manufacturing projects or those related to energy efficiency), making it an excellent choice if you’re looking at purchasing a business with significant assets.

While the SBA 504 loan is an excellent resource for business expansion and asset acquisitions, it should be noted that it’s not typically used for buying businesses in the traditional sense. The 504 loan program is primarily designed to aid in the purchase of tangible assets like real estate, buildings, and equipment, rather than for buying the entirety of an existing business. 

Hence, if your objective is to acquire an entire business, the SBA 7(a) loan is likely a more suitable option. However, every business acquisition is unique, so it’s crucial to consult with a finance professional or a loan officer to determine the best financing solution for your specific situation.

Reasons to use an SBA loan to buy a business.

Now that we know what SBA loans are, let’s explore why they’re a great option for buying an existing business. Here are some of the top reasons to consider using an SBA loan:

• Lower down payment – Compared to traditional loans, SBA loans typically require a lower down payment, which can be as low as 10%. This makes it more accessible for buyers who may not have a large amount of cash on hand.
• Longer repayment terms – SBA loans also come with longer repayment terms, ranging from seven to 25 years, depending on the loan type and amount. This can help make your monthly payments more manageable.
• Lower interest rates – SBA loans often have lower interest rates compared to conventional loans. This can mean significant savings over the life of the loan.
• No collateral required – For loans less than $50,000, 7(a) loans do not require collateral, which can be a major advantage for buyers who may not have valuable assets to put up as security.
• Support and resources – The SBA provides support and resources to help small businesses succeed. By using an SBA loan, you can tap into this network of experts and resources to help your business thrive.

How to qualify for an SBA business acquisition loan.

Now that you know the benefits of using an SBA loan to buy a business, you may be wondering what it takes to qualify for one. While each individual lender may have their own specific requirements, here are some general factors that can impact your eligibility:

• Good personal and business credit score – Your credit score is an important factor that lenders consider when evaluating your loan application. A good credit score shows that you are responsible with managing your finances and are likely to make timely loan payments.
• Experience in the industry – Lenders want to see that you have experience and knowledge in the industry of the business you are looking to purchase. This can help assure them that you have a good understanding of how to run the business successfully.
• Strong business plan – A strong business plan is essential for any loan application, as it outlines your strategy and projections for the future of the business. The SBA also offers resources to help you create a solid business plan.
• Adequate cash flow – Lenders want to see that the business has enough cash flow to support loan payments. They will analyze the financials of the business and your personal finances to determine this.
• Down payment – As mentioned earlier, SBA loans require a down payment. Depending on the loan type and amount, this can range from 10% to 20%. Having enough money saved for this is crucial in qualifying for an SBA business acquisition loan.

How to apply for an SBA business acquisition loan.

If you meet the eligibility requirements and have found a business you want to purchase, the next step is to apply for an SBA loan. Here’s a general overview of the steps involved:

1. Research lenders – Start by researching different lenders who offer SBA loans for business acquisitions. Consider their interest rates, terms, and reputation. A variety of lenders offer SBA loans, including traditional banks, credit unions, online lenders, and specialized SBA lenders.
2. Gather required documents – Most lenders will require similar documents, such as personal and business tax returns, financial statements, and a business plan. Make sure you have all the necessary paperwork ready before applying.
3. Fill out the loan application – Once you have selected a lender, fill out their loan application form. Be honest and accurate with your information.
4. Wait for approval – The approval process can take anywhere from several weeks to a few months. The lender will review your application and may ask for additional information or clarification.
5. Close the deal – Once you’ve been approved and have signed all the necessary documents, the funds will be disbursed, and you can officially become the new owner of the business!