Using an SBA 7(a) Loan to Buy a Business
You can use the SBA 7(a) loan to help you cover the expenses associated with buying an existing business.
Buying a business that’s already established could allow you to walk into work with customers, employees, and inventory from day one. But you still need capital to buy an existing business, and if you can’t get a traditional small business or personal loan, consider a loan backed by the Small Business Administration, which could allow you to purchase an existing business.
But First: What is an SBA 7(a) Loan?
The SBA 7(a) loan is a government-backed loan provided by financial institutions like banks and credit unions. The SBA doesn't lend directly, but they insure these loans in case a borrower defaults. This makes the SBA 7(a) loan an attractive option for lenders, since it reduces some of the risk involved. You can use the SBA 7(a) loan for a variety of things, including the purchase of real estate or land, equipment, working capital, refinancing debt, and — of course — buying a business!
Because your lender will need to get approval from the SBA to back your loan, the application process and paperwork for an SBA 7(a) loan can be lengthy. However, these loans typically boast better terms than traditional small business loans, and sometimes even come with counseling to ensure your business runs efficiently.
Who Qualifies for the SBA 7(a) Loan?
In general, you must be a prime borrower to qualify for an SBA loan. However, it’s typically easier to get a loan to buy an existing business than it is to get a startup loan to get a brand new business off the ground, because lenders can see the track record of the business you’re planning to buy.
SBA 7(a) loans have attractive interest rates, repayment terms, and closing costs, but they do have stricter qualification requirements than other business loans. Generally, in order to qualify for one, you’ll need:
A credit score of at least 690
A record free of any bankruptcies in the past three years
At least a 10% down payment
For franchisees, a paid franchise fee before the loan funds are released
A clean criminal history, or the ability to explain any misdemeanors on your record
No current Federal debt
Industry or managerial experience (to prove you’re qualified to run the business you want to buy).
In addition, the business that will benefit from the loan will generally need to be:
A for-profit entity
A small business by definition
Based in the United States
A business with invested equity
A business that has exhausted its other financing options.
These requirements ensure that the loan is eligible for SBA backing. If the loan is ineligible, you’ll need to seek other forms of small business financing.
How is an SBA 7(a) Loan Secured?
In addition to the SBA's backing, lenders also like to reduce risk by requiring the borrower to offer a down payment or collateral upfront. Even if the business you’re buying is very profitable, there’s still a chance that it could fail. Because of this, your lender will likely still require you to put up some collateral to secure the loan. This collateral could include:
Other business or personal assets.
It’s important to remember that lenders may discount the value of the collateral you pledge against the loan. That’s because many types of collateral (such as vehicles) lose value over time. Alternately, a lender might require 10–20% of the loan amount down.
Who Guarantees the Loan?
All owners of your business who have at least 20% equity in the company will be required to guarantee the loan, and you’ll need to include the names and information for each of these owners in your application paperwork. In addition, if your spouse has at least 5% equity in the company and you and your spouse’s equity totals at least 20% (for example, if you have 15% equity and your spouse has 5% equity), your spouse will have to guarantee the loan, too.
One distinction: if you are a sole proprietor, you will not need to provide a separate personal guarantee for your SBA loan because you execute the note yourself as a borrower (instead of as a business).
What Types of Businesses Can I Buy with an SBA 7(a) Loan?
The business you’re buying should be open and operating. The SBA will need to know what type of business you plan to buy to determine if it’s likely to continue making a profit (and you’ll be likely to pay back the loan amount). In general, the business you’re planning to buy with the loan proceeds must be:
Established for at least 2–5 years.
What Documentation Will I Need to Provide for the SBA 7(a) Loan?
Generally, you’ll need to include the following documentation with your application package:
Agreement to purchase the business
Letter of intent to buy the business
Business tax returns for the past three years
Any outstanding business debt
Long-term business contracts
Documentation of business assets
Business lease agreement
Incorporation documents and/or business license
In addition, the SBA will usually order an independent business appraisal to give lenders an idea of what the true value of the business is.
To complete your application package, you’ll be required to submit SBA-specific forms and documents. The forms and documents commonly required in the application package include:
SBA Form 1919 (borrower information form)
SBA Form 912 (statement of personal history)
SBA Form 413 (personal financial statement)
Financial statements, including a balance sheet, profit and loss, and income projection.
The SBA allows applicants to get help (for example, from a lawyer or a translator) filling out the application paperwork, but your lender will be required to submit information about who gave you help to the SBA, so you’ll need to document who this person is as well.
Buying a Business with the SBA 7(a): Next Steps
Once you’ve decided that an SBA 7(a) loan is for you, you’ll need to contact a lender to help you get started. The paperwork, terms, and jargon involved in putting together an application package for an SBA loan can be overwhelming. You can get personalized guidance at SBA7a.Loans. Because we live and breathe the SBA 7(a) loan process, we know how to help you at every stage of the process. We'll match you with the lender most likely to approve your request, even if we have to look outside the SBA platform.