SBA Loans - Chapter 1
A Small Business Administration (“SBA”) loan is an acquisition entrepreneurs' secret weapon when buying a business. The SBA was created in 1953 as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation. What I want you to take from this is that it is a government sponsored organization not just a normal bank loan or a high interest loan company.
Although this is entirely a government sponsored business to get an SBA loan you usually go through a SBA lender. Most SBA loans are facilitated by banks, but they are not being assessed by the banks standards or being evaluated by the bank itself. However, when looking for an SBA loan you want to find a “SBA Preferred 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.
By contrast, non-preferred lenders must submit the loans directly to the SBA for approval, which makes the process longer. Going through a preferred lender can speed up the process by 4-8 weeks. Those 1-2 months can make a very large difference when you are hoping to close on the business sooner rather than later. Once both parties have signed the Letter of Intent then the seller's time and energy is spent on selling the business versus operating the business.
I want to touch on a few of the initial advantages and disadvantages of an SBA loan. We are going to go through a deep dive into these throughout future blogs but in the meantime knowing these will help you put together the pieces of an SBA loan.
Generous term lengths, such as a 10-year term on non-real estate loans. This is really helpful when you are buying a business as a long-term investment and allows you to not restrict capital investment.
Caps on interest rates, including a cap of 2.75 points over prime on loans over $50,000 with terms of at least seven years. The prime rate usually floats between 4-6% but it is currently 3.25%.
Financing for up to 80 to 90 percent of acquisition costs. This will allow you to put down $100,000 - $200,000 on a business that you are purchasing for $1,000,000.
Lower down payment requirements. When you are taking out loans of this size a small monthly payment can equal thousands of dollars in additional retained earnings for you or your business.
Buyers can have a difficult time applying for an SBA loan due to specific requirements. The SBA loan application process requires an extensive amount of paperwork (ranging from personal finance reports to cash flow projections).
Interest rates can be considered high but depends on your personal circumstances and the business financials and assets.
To receive an SBA loan you are personally liable for this loan even when there is a business to loan against.
Considering the advantages and disadvantages of an SBA loan, it is critically important to understand but it is also one of your greatest tools you can use to get a better quality business if it is out of your price range. We want to help buyers through this process so we are going to do a 5-part series on SBA loans so that you can fully understand the risks and rewards to using an SBA loan to buy your business.