SBA Loan to Purchase Existing Business
An SBA Loan can be the easiest type of funding for a new business owner to purchase an existing business.
If you need business funding to acquire an existing business, we show you the case study covering the frequently asked questions a new client asked, as well as additional information, he needs to know, as he purchases his first business.
The client is a new business owner, who has never owned a business. He was looking for a business he could purchase for a fair price, that would pay himself a good salary and help him build wealth for his family.
If you are an established business owner looking to expand or buyout other businesses, much of this information will be helpful, but we may have other financing options more suitable for you.
An SBA loan can be the best way for a new business owner to buy an existing business because banks have less risk on their balance sheet because the SBA guarantee most of the business loan if things don’t go as planned and there is a default.
For purpose of this video we are using the general guidelines of one of our lending partners. One of the 5 largest SBA Preferred Bank Lenders in the country,
Every situation will vary, that’s why we have multiple SBA lenders and traditional lenders, but in general this is what you can expect if you are considering business financing to purchase an existing business
The minimum business purchase price you should consider to receive fair priced financing is $500,000 with an EBIDTA of around $95,000 to $100,000.
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Frequently Asked Questions (FAQ) for New Business Owners
Buying An Established Business
These are the most frequently asked questions we get from most people like you who are seeking a business loan to buyout a currently operating business.
How long does it take to get an SBA Loan to acquire an existing business?
Once we receive the proper information and documentation from you, a loan for business purchases that does not include commercial real estate typically take 30 to 45 days to close.
Businesses with real estate generally will take 45 to 60 days, because of title search, appraisal and the Environmental Study.
The biggest delay in the timeline is information, documents from either the borrower or the existing business owners.
I would highly recommend before submitting a letter of intent (LOI) to purchase a business, making sure the current owners/sellers will cooperate. Ask if they have the required documentation and financials and how long it will take them to deliver to you or your advisors.
How long does it take to get Preapproved or Prequalify for a SBA Loan?
24-48 hours.
What FICO or credit score do I need for an SBA Loan?
Generally, you’ll need a FICO score 620 minimum.
685 or higher is a lot easier and you get your deal done quicker.
The lender will require Credit Scores from each owner that owns more than 10%
Credit history of the borrowers will be a factor for the rate you’ll pay and can be a factor on how quickly you can close on your loan.
What is the minimum loan size:
The minimum loan size for us is $350,000 generally if you want more options and lenders, you need to be over a million dollars.
What is the maximum loan size?
SBA (7) loans have a maximum of $5 million
What if we are below or above $350,000 and $5 million loan size?
We have other options available, such as private loans, SBA (504), and other bank loans.
For loans over $5 million, we can use a lender who will do a portion in a conventional loan or the lender may do an SBA (504) loan if there is real estate involved in the deal
What are the interest rates? (as of 01/09/2023)
Bank lenders are generally prime + 2 or 2.5%. Currently 10%
If you have extremely great credit and the deal is really good, you may get 1.75.
You should plan on your rate being 2% to 3% above prime on an sba loan.
If your credit is dinged up a little bit or it’s on the deal is somewhat what we would call then meaning the profitability barely covers the minimum and those rates are going to go up we may have to take you to a lender and you know where it could go up to 3% but generally it’s going to be and a half percent is typically above Prime is what people charge.
How much money do I have use as a down payment or cash infusion?
If the deal does not include real estate, you will typically need 20% cash to infuse in the deal.
Typically, a new franchise deal will need 20% down.
If the deal includes business real estate, the minimum should be 10%.
Generally, the lender will want to see a minimum of 5% cash from the buyer.
This typically is in addition to real estate or other hard assets they can use as collateral.
If you don’t have 10% cash, the Bank typically will allow seller financing.
This is usually a note that matches the duration of the loan. For example, if it’s a 10-year seller note, it would be a subordinated note to the SBA loan 10-year.
What is the term/length of the loan?
if you’re purchasing a business that does not include Real Estate. The loan is for the business, equipment or working capital, generally it will to be a 10-year loan.
If you can purchase business real estate with the business the amortization is typically 25 years.
It typically is easier and more attractive to the lender if there is real estate involved in the purchase. This gives them extra collateral.
If you are starting a new franchise, typically need 20% down and will be a 10 yr term loan.
Would be a subordinated note to the SBA loan 10-year.
What is the term/length of the loan?
If you’re purchasing a business that does not include Real Estate, the loan is for the business, equipment or working capital, generally it will to be a 10-year loan.
If you can purchase business real estate with the business the amortization is typically 25 years.
It typically is easier and more attractive to the lender if there is real estate involved in the purchase. This gives them extra collateral.
if you are starting a new franchise, typically need 20% down and will be a 10 yr term loan.
What are the restricted industries or industries to avoid:
Real estate investment firms, when the real property will be held for investment purposes.
Firms involved in speculative activities. Oil, commodities, futures, when not part of the regular activities of the business.
Dealers of rare coins and stamps are not eligible.
Banks, finance companies, factors, leasing companies, insurance companies.
Pyramid sales plans, where a participant’s primary incentive is based on the sales made by an ever-increasing number of participants. Such products as cosmetics, household goods, and other soft goods lend themselves to this type of business.
Gambling.
Charitable, religious, consumer and marketing cooperatives, and churches .
A note, even though it’s not restricted industry lending on hotels is very difficult we have lenders that will do it must be patient because a lot of banks aren’t real keen on hotels right now.
How long should the financial history be?
The business should have at least a 3 year track record. The longer the business has been around and been profitable the quicker and easier it will be to obtain financing.
How do I know if the business is making enough money?
Different lenders have different requirements, but in this case study-the most recent year should be profitable. If not, they’ll will consider a business that has been bruised, since it’s been in business for 3 years. They obviously prefer it has been profitable all 3 years the trend the trend is looking up and they were profit last year and the trend is looking up, it should be ok.
They’re looking for profits is net of expenses. You can use EBIDTA, seller based earnings, is also often used. One of those two numbers will need to be 120% higher or a factor of 1.2 the cost of the debt.
For example if you have a loan payment of $10,000 a month the business would need net income or EBIDTA of 12,000 a month minimum.
And like everything else, the more cushion you have, the quicker the loan will get underwritten and the more likely you get funded.
This sounds like common sense, but let me say it, the better financials, the higher the debt service coverage ratio, the better the cash reserves, the better the collateral or real estate- the quicker and more likely you will get funded quicker and with better terms.
What is a full Financial package?
The items the lender needs to prequalify and offer financing for your business purchase:
Use the following checklist to ensure you have everything the lender will ask for. Once your loan package is complete, your lender will submit it to SBA:
- Borrower information form: Complete SBA Form 1919 and submit it to an SBA-participating lender
- Financial statements: Complete SBA Form 413 (personal financial statement). This helps SBA and other stakeholders assess your eligibility.
- Business financial statements: Submit the following to help show your ability to repay a loan:
- Profit and loss statement – Current within 180 days of your application. Also include supplementary schedules from the last three fiscal years.
- Projected financial statements – Include a detailed, one-year projection of income and finances and explain how you expect to achieve this projection.
- Current balance sheet and profit and loss statement
- Federal income tax returns for the previous three years
- Proposed bill of sale including the terms of sale
- Asking price with schedule of inventory, machinery and equipment, and furniture and fixtures
- Franchise, jobber, or licensing agreements
- Proof of equity injection
- Business Plan
If you have questions or would like more information, please give us a call at (317) 589-0118 or schedule a phone meeting:
