Exploring SBA Financing for Buying a Business

When purchasing a business valued at $5 million or less, checking if you qualify for a Small Business Administration (SBA) loan may be the best strategy, especially for first time buyers. 

You’d be correct in assuming that securing funds is one of the most crucial steps to acquiring a business. Shockingly, around 84% of conventional loan applicants are rejected every year. This is where the SBA swoops in, securing almost 95% of bank loans for small business ventures. 

Most small business investors attempt to buy a business using a combo of personal savings, friends and family money, bank loans, including those backed up by the SBA, and retirement funds. This can make sellers nervous, and rightfully so, about working with such buyers since they depend on several financing sources to come together for one purchase. Of course, there’s absolutely nothing wrong with tapping as many sources as you need, but did you know there’s a little hack to stand out amongst the rest? It’s called getting the business you want to buy “pre-approved” for an SBA loan! This can be attractive for many sellers because, not only does it give them more confidence in your ability to close the deal, it may also result in a higher purchase price along with the elimination of any sort of seller financing, which are two major wins for a seller. These are levers a buyer can pull when competing with other cash buyers.

Here's an important detail: The SBA itself does not issue any loan directly and, instead, guarantees them through programs like the 7(a) and 504 loan programs. Rather, it is the bank or lending institution that will actually process and issue the SBA loan. 

Potential perks for SBA loans include:

• More flexible loan structuring (for example, one multi-purpose loan)
• Longer payback periods (up to 25 years)
• More flexibility with borrower’s credit rating
• Lower closing costs and the ability to bundle “total project costs” into the loan

On the other hand, SBA loans may not be as competitive with rates as conventional business loans. There is also more red tape involved and thus it can take longer (even a few months) to complete the process. The SBA also generally requires that the borrower demonstrate it isn’t able to find funding elsewhere before being considered for an SBA loan program.  

In conclusion, recognizing the value of SBA financing in business transactions is vital for both buyers and sellers. Having an understanding of these programs can significantly impact the outcome of a business sale or purchase. In our opinion, they’re not always the best avenue, but when other lending sources are not an option, SBA loans have proven to be a successful alternative. That is why SBA Financing is and will continue to be a pillar of small business deals.