You need to secure financing if you're an entrepreneur looking to purchase an existing business or franchise without using your savings. But where do you start? The Small Business Administration (SBA) is an excellent place to look.
It offers acquisition loans, which are one of the best options in the market. These loans provide attractive interest rates, flexible repayment terms, and relatively low down payment requirements. Some sellers even get their businesses pre-approved for SBA 504 loans to attract potential buyers.
An SBA acquisition loan is a financial tool that empowers businesses to grow strategically through acquisitions. If you're a business owner, you can use this loan to buy a competitor to eliminate competition and gain market share.
You can also acquire a complementary business to offer your existing customers a broader range of products or services or purchase a company with valuable assets (like technology, equipment, or a skilled workforce) to help you grow.
When you secure an SBA acquisition loan, you agree to use it strictly for these purposes. You must use it for something other than general business expenses or ongoing operational costs.
You apply for a loan to purchase a specific asset or another business. The SBA guarantees a portion (up to 85%) of the loan, and the acquired asset serves as collateral, thereby reducing the risk for lenders. This allows them to offer more competitive interest rates and repayment schedules than traditional loans.
Note that not all banks specialize in SBA loans. Luckily, the SBA offers a Lender Match tool that connects you with lenders in your area who are familiar with SBA programs and can guide you through the specific requirements for an acquisition loan.
You may have spotted a valuable asset or a company that perfectly complements yours but need the upfront cash to seize it. Or your current business has plateaued, and you need a strategic acquisition to expand into new markets and reignite growth.
An SBA acquisition loan provides the funding you need at attractive rates so you can act strategically.
Unlike a line of credit, SBA acquisition loans are intended for a specific purpose. The funds are used for the approved acquisition and must be repaid within a set timeframe. This can help ensure the loan is directly tied to your strategic growth plan.
Let's break down the five essential requirements you need to meet to get approved for an SBA acquisition loan:
The SBA sets a relatively low minimum down payment of just 10%. That said, it's essential to consider the bigger picture beyond this amount.
Ideally, you want to have enough working capital left over after the purchase. Including working capital in your loan structure can help you pay for closing costs and the costs of transitioning to new ownership.
After all, taking over a business requires adjustments, and you need working capital to bridge the gap during this period. Working capital also provides a buffer for unforeseen expenses during the first few months of ownership because even the most thorough due diligence might uncover only some potential costs.
By including working capital in your loan structure and going beyond the minimum down payment requirement, you demonstrate a more comprehensive financial plan to lenders and show that you're prepared for the acquisition's full scope. This increases your chances of securing a robust SBA loan package.
Cash or savings are the most straightforward source of downpayment funding, but you can open yourself to these options.
Home equity might be a practical alternative if you have additional income to manage the payments. Gifts from family or friends are also viable (provided they're formally documented). Investors seeking a stake in your growing business might be willing to give a loan specifically for the downpayment.
Be prepared to show proof of your down payment source for the SBA acquisition loan application. Lenders will typically ask for documentation covering the past three months, so keep clear and accurate records of bank statements, sales receipts, or loan documents, depending on how you funded your down payment.
Lenders will scrutinize the financial health of the business you're buying. Its cash flow should be large enough to comfortably support overhead expenses, your salary, and loan repayments, among other costs.
Businesses often minimize profit on paper to reduce tax liabilities, but don't worry—banks understand this and will adjust their cashflow analysis accordingly. The key to ensuring that your SBA acquisition loan is approved is consistency in the business's cash flow. Make your case stronger by explaining what caused temporary dips (if any).
Having experience in the field where the business operate scan boost your chances of getting an SBA acquisition loan. If you have never worked directly in the industry, show that you've successfully managed a business (or several) and have relevant skills to take over a new one.
If the company you want to buy has critical employees willing to stay or the seller is open to assist you after the sale, highlight these points to the lender.
Your credit history will be scrutinized, especially if you're applying for a loan worth over $350,000. Technically, there's no strict minimum credit score, but lenders want a history of responsible credit use.
It's better to be upfront about any issues in your financial past. This makes lenders more receptive to working with you to understand and mitigate concerns. Address any potential red flags the lender might see early in the application process. Securing an SBA loan requires transparency.
Need help with your SBA loan? Capital Investors Direct offers guidance on SBA 7(a)loans for small businesses and SBA 504 loans. Contact us to discuss your requirements.
