How to Get an SBA Loan to Buy a Business

As the country moves through the post-pandemic business environment, there may be a growing number of businesses available for sale. Nearly every industry was impacted by the pandemic, and many companies have changed their business models.

Many owners may not be interested in operating a business moving forward, and want to sell. In addition, a growing number of baby boomer owners are retiring, and have businesses for sale.

If you’re wondering how to fund a business purchase, an SBA loan may be a good option. Lending to an existing business is less risky than providing funds to a startup business. An established business has a customer base, cash inflows, and a track record of generating a profit. The SBA provides funds for small business purchases, in order to grow the economy.

How The SBA Helps Business Owners

The Small Business Administration (SBA) was created in 1953 to help small business owners and entrepreneurs, and SBA is a cabinet-level federal agency. The SBA provides counseling, capital, and serves as an advocate for small business interests.

SBA offers a number of funding programs to help business owners secure the capital needed to operate.

Finding An Investor

A Small Business Investment Company (SBIC) is a privately-owned firm that invests in small businesses by purchasing debt or equity. SBICs are experts in a specific industry, and both the SBIC and SBA provide funds for the investment.

Securing A Grant

The SBA provides grant funding to promote entrepreneurship in certain industries. This option is available to small businesses that pursue scientific research and development. The goal is to provide grants for projects that may become commercially successful.

Providing A Surety Bond

Many businesses must provide a surety bond to protect the client’s property and to provide insurance that contracted work will be completed. Surety bonds are common in the construction industry. The SBA provides surety bond guarantees for specific surety companies so that small businesses can win contracts and generate revenue.

Many owners use an SBA loan to purchase businesses, and there are several parties involved in the loan process.

SBA Loan To Buy A Business

The SBA does not provide loans directly to small businesses. Instead, the SBA works with lenders that provide loans, and provide loan guarantees in order to reduce the lender’s risk. To obtain loan guarantees, the lender and the borrower must follow SBA guidelines.

SBA loan guarantees make it easier for lenders to finance small business loans, and there are several categories of SBA loans.

504 Loans For Fixed-Asset Purchases

The 504 Loan Program provides long-term, fixed-rate financing of up to $5 million to purchase fixed assets. The loans are available through Certified Development Companies (CDCs) that promote economic development in a community. Borrowers must meet these requirements:

  • Operate as a for-profit business in the U.S.

  • Tangible net worth of less than $15 million. Tangible net worth excludes intangible assets, such as patents and copyrights.

  • Average after-tax net income of less than $5 million a year for the two years preceding the time of the application.

Borrowers must have management expertise, a comprehensive business plan, and the ability to repay the loan.

The loan can be used for buildings, land, machinery, and equipment, and to improve existing facilities. To apply, find a CDC in your area, use the search tool and start the loan process with a qualified CDC lender.

The most common type of SBA loan is the 7(a) Loan Program, and these loans can be used to acquire or expand an existing business.

Using The 7(a) Loan Program

The 7(a) program can be used for working capital, to refinance current business debt, or for a business purchase. The maximum loan amount is $5 million, and the amount of the loan depends on business profit, credit history, and other factors.

Your lender can help you with the application process, and determine the right type of loan for your business purchase.

Applying For A 7(a) SBA Loan

Eligibility for a 7(a) loan is similar to the 504 loan requirements. You must operate a for-profit business in the U.S. that meets the SBA definition of a small business, and you must have invested equity.

The SBA has an expectation that the borrower uses alternative financial resources, including personal assets, before seeking financial assistance. Borrowers must demonstrate a need for a loan, and have a plan for the use of funds.

To apply, contact a local lender that provides SBA-backed loans, and refer to the 7(a) Loan Application Checklist to gather the required loan documents. The checklist includes these documents:

  • Borrower Information Form: Officers, directors, and owners are included on this form

  • Personal Financial Statement: Owners may be required to provide a personal financial statement listing the owner’s assets and liabilities

  • Business financial statements and tax returns

The borrower must have a strong credit score, and the loan will require a minimum down payment when the business is purchased. You’ll also need to prove that you have the management experience to successfully operate the acquired business.

You have a number of loan options, and you may need an expert to explain the funding process. The business brokers at Raincatcher can apply their experience to your business purchase strategy.

Work With An Expert

Raincatcher’s staff has worked on over 9,200 transactions for small and medium-sized businesses. They can help you find a great company to purchase and provide advice on loan options.

Work with Raincatcher today to get the best SBA loan deal. Contact us today to learn more.

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