Getting business purchase financing or SBA loan financing to buy a “large” small business can be one of the most important aspects of the buying process. Not too many business buyers have all cash for a purchase and not many business owners are willing to take back a sizeable note these days. Business buyers, business brokers and agents, and owner/sellers need to be prepared well in advance with the information below to increase the odds of getting SBA 7a loan financing to complete a business purchase.
SBA Lenders look at approximate 30 factors in both the business buyer (borrower) and at the “large” small business that is being sold.
Here are some of the key factors for SBA 7a loan financing when buying a business:
Buyers need between 10%-20% for a down payment depending if there is real estate with the business or if just the business is being sold by itself. The down payment can come from many different sources: savings, equity built up in your home (home equity line of credit or 2nd on your home), a gift (usually from only family members), or retirement plan (401K, Pension, IRA etc.).
Buyers need to have good to excellent credit – usually a credit score above 675 will suffice. Any business bankruptcies or many late payments will usually nullify the chances of a borrower no matter how good the other criteria looks.
Lenders like buyers who has experience in the business they are buying or in a related industry, or with specific job skills relating to the business they are buying. Lenders also like management experience or buyers who have previously owned a business and know what it takes to grow and keep a business from failing after purchase.
Buyers should with guidance write a short business plan/executive profile including two years of projections (moving forward) on the business they purchasing. SBA Lenders usually require this to make sure you have sufficient knowledge about the business and industry you are buying into and how the business will do financially once the business is in new hands.
Positive cash flow for business purchase financing must more than cover the debt service of the SBA 7a loan and provide you with adequate income for annual living expenses, otherwise you won’t get hour financing request past the underwriting process.
Does the potential buyer have equity in any real estate (either personal or investment based) that can be collateralized (SBA SOP’s dictate that if colleterial is there it must be attached – with provisions). Although not imperative with lenders for a positive underwriting decision (provable annual cash flow on the deal is still the most important factor), this can strengthen the deal if other aspects of the transaction are lacking or need shoring up.
Does the business that’s being sold have management in place or key employees who are going to remain in place after the sale? Try to get commitments from existing key personnel to stay during the sales process and after the transaction has been completed
Make sure there is adequate training (provided for in the LOI or Purchase Agreement) after the sale of the business. SBA Lenders look for a training period to be anywhere from 1 months to 6months from the seller selling the business, depending on the type of business and the complexity of the day to day operations needed by the present owner.
Will the current owner/seller take back a note? If the owner is willing to take back a note (even a small one for 10%) this shows the SBA lender that the owner is confident in the deal and is willing to take a chance on the buyer! It may also satisfy a portion of the injection aspect of the deal.
SBA Lenders will also want to know if you have any other outside sources of income i.e. other business income, income from a spouses employment, rental properties, investment income etc.
The entire SBA loan process from underwriting to processing & closing can realistically take 45 days to 4 months – it all depends on many of the factors above plus other issues we will assist you with during the process of securing SBA financing.
