If you're considering buying an existing business, an SBA 7(a) loan could be the perfect solution for covering the expenses associated with the acquisition.
These government-backed loans can offer better terms (thanks to the reduction of risk for lenders), making them an attractive option for those seeking loans to buy a 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. If you can’t get a traditional small business or personal loan with reasonable terms, 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 insures these loans in case a borrower defaults. SBA 7(a) loans can be used for various purposes, including purchasing real estate, 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.
Why Choose an SBA 7(a) Loan Over Traditional Loans?
When it comes to business financing, both SBA 7(a) loans and traditional loans have their merits. But the SBA 7(a) loan stands out for several reasons:
Government Backing
One of the significant advantages of the SBA 7(a) loan is that it's backed by the government. This reduces the risk for lenders, potentially leading to more favorable loan terms and interest rates for borrowers.
Flexible Usage
While some traditional loans may come with restrictions on how the money is used, SBA 7(a) loans offer more flexibility. They can be used for a wide range of business purposes, including working capital, refinancing other debts, and of course, buying a business.
Longer Repayment Terms
SBA 7(a) loans often have longer repayment terms compared to traditional loans. This can lead to lower monthly payments, making it easier on your business's cash flow.
Guidance and Counseling
Unlike most traditional loans, an SBA 7(a) loan sometimes comes with access to free business counseling and education, ensuring your business operates effectively and efficiently.
While the SBA 7(a) loan may seem like an obvious choice given these benefits, it's essential to weigh these advantages against the specific needs and circumstances of your business.
Who Qualifies for a SBA 7(a) Business Acquisition Loan?
SBA 7(a) loans have stricter qualification requirements than many other business loans. To qualify for a loan to purchase an existing business, you'll generally need:
- A credit score of at least 680
- No bankruptcies in the past three years
- At least a 10% down payment (but 100% financing is possible in some cases)
- 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
The business benefiting from the loan must also meet certain criteria, such as being a for-profit entity, a small business by definition, based in the United States, having invested equity, and having exhausted other financing options.
Common Challenges in Securing an SBA 7(a) Loan and How to Overcome Them
Navigating the SBA 7(a) loan process can be daunting, and many businesses encounter hurdles along the way. Here are some common challenges and tips to address them:
Lengthy Application Process
The process for securing an SBA 7(a) loan can be extensive due to the additional layer of approval from the SBA.
Solution: Start your application well in advance of when you need the funds and stay organized. Keep all required documentation handy and regularly follow up with your lender.
Strict Qualification Criteria
As highlighted earlier, the qualification criteria for SBA 7(a) loans can be more stringent than other business loans.
Solution: Thoroughly review the qualification requirements and ensure your business meets them before applying. If you're on the borderline of some criteria, work to improve those areas, such as boosting your credit score or refining your business plan.
Required Collateral
Most lenders will require collateral to secure the SBA 7(a) loan.
Solution: Identify business or personal assets that can be used as collateral. If you're short on collateral, consider seeking a co-signer or looking into other types of financing.
Concerns About Business Viability
Lenders want to ensure that the business you're buying or expanding is viable and can repay the loan.
Solution: Present a solid business plan with clear financial projections. Highlight your experience, the business's history, and your strategies for growth.
Being aware of these challenges from the outset can better prepare you to address them proactively, increasing your chances of securing your SBA 7(a) loan.
What Types of Businesses Can I Buy with an SBA 7(a) Loan?
The business you're buying should be open, operating, profitable, and established for at least two to five years.
How Is an SBA 7(a) Loan Secured?
Lenders typically require collateral to secure the loan, such as real estate, equipment, vehicles, accounts receivable, or other business/personal assets. A lender might also require a 10% to 20% down payment.
Who Guarantees the Loan?
All business owners with at least 20% equity in the company are required to guarantee the loan, and this information must be included in the application paperwork.
Spouses with at least 5% equity may also need to guarantee the loan if their combined equity totals 20% or more.
Today's SBA 7(a) Loan Terms
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What Documentation Will I Need to Provide for the SBA 7(a) Loan?
You'll need to submit several documents with your application. These include the following:
- 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
- Business plan
The SBA will also order an independent business appraisal. In addition, specific SBA forms and documents will be required, such as:
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.
Buying a Business with the SBA 7(a): Next Steps
Once you've decided that an SBA 7(a) loan is right for you, you'll need to find and contact a lender to get you started.
That's where we come in. The SBA 7(a) Loans team will match you with the lender offering the best terms and most likely to approve your request, walking you through the entire process.
Case Study: Caroline Buys Her Dream Business
Caroline, an ambitious marketer living in Reno, Nevada, had long envisioned herself owning a business. When the opportunity to buy a local, well-established digital marketing agency, Nevada Digital Pioneers, arose, she knew she had to act. However, the agency's $1.2 million asking price seemed daunting.
Caroline believed the SBA 7(a) loan was the perfect solution for her financial needs. She reached out to an SBA-approved lender and began the application process. Excited, Caroline crafted a detailed business plan filled with innovative growth strategies, financial projections, and a personal touch highlighting her marketing expertise.
But Caroline's journey wasn't without its challenges. Initially, the bank expressed concerns about her lack of experience in managing a business of this size. Additionally, the local market was growing increasingly competitive, and the bank worried that the agency's growth potential might be limited.
Determined to secure her loan, Caroline revised her business plan to address these concerns. She provided a comprehensive marketing analysis, emphasizing how her strategies would differentiate Nevada Digital Pioneers from its competitors. Caroline also enlisted the support of a seasoned mentor with extensive experience in the digital marketing industry.
Impressed by Caroline's resilience and thorough planning, the bank approved her SBA 7(a) loan for $1 million, offering a 10-year repayment term and a competitive, fixed interest rate.
With the loan, Caroline acquired Nevada Digital Pioneers and faced the challenges head on. In her first year, she expanded the agency's client base, increased revenue, and brought in fresh talent. By year's end, Nevada Digital Pioneers experienced a remarkable 20% growth in revenue, surpassing even Caroline's ambitious goals.
This is a fictional case study provided for illustrative purposes.
More on SBA Loans From Our Blog
Experts Share Their Secrets on Why Small Businesses Don't Get Approved for SBA Loans
We wanted to get some perspective from commercial loan officers on the most common mistakes they see business owners making when applying for a loan, so we posited this question to several different lenders, and the responses were surprising.
Wondering What a Sample SBA 7(a) Loan Proposal Looks Like?
If you're a hands-on learner (and the type who likes to be insanely prepared), you likely want to know what an SBA loan proposal might look like before you jump into the arduous process of applying for one. That's what we're here for! In our sample loan proposal, see a filled-out version of a real SBA loan application.
SBA 7(a) Loan Checklist: Getting Ready to Apply
Between growing business, putting out fires, and trying to squeeze in some sleep (remember that?) you also have to magically conjure up the time to prepare to apply for your SBA loan, too. Don’t let important details get lost in the shuffle. Use our PDF checklist as your personal assistant, and stay on task from start to finish.
What Are the SBA 7(a) Loan Borrower Eligibility Requirements?
Eligibility depends on several factors decided by both the lender and the SBA. You must operate a for-profit business, have reasonable owner equity, have a proven need for the loan, and intend to operate the business within the United States or its territories.
How Long Does it Take to Approve an SBA 7(a) Loan?
SBA 7(a) approval time varies, depending on the lender’s experience level. Preferred lenders offer fastest closings, followed by certified lenders and standard lenders. All will guarantee your small business loan under SBA rules.
What Are Liabilities in the SBA 7(a) Program?
A business’s financial obligations, like SBA 7(a) loan payments, salaries, mortgages, and deferred payments, are considered liabilities. Liabilities are deducted from a business’s total equity. A business will settle liabilities over time by paying them off, or by trading goods or services.
What Are Fixed Assets in the SBA 7(a) Program?
The SBA talks about fixed assets as tangible and long term, meaning they can’t be converted into cash easily. Things like real estate and land, certain equipment, and other specialized property are considered fixed assets.
What Is an SBA Preferred Lender?
An SBA Preferred Lender can help borrowers get the funds they need faster than a regular SBA lender. When a bank or financial institution has a "Preferred Lender" status, this institution has the authority to make final credit decisions on SBA-guaranteed loans.
Do SBA 7(a) Loans Require Collateral?
The SBA 7(a) loan programs don't require collateral, but individual banks may have their own requirements. Buildings, equipment, and land are all possible types of collateral that you can offer.