SBA Loans & Commercial Loan Financing For Business
Purchases Priced Between $400,000 And $5,000,000

SBA Small Business Loans - What All Borrowers Need To Know

Getting SBA loan or other financing to buy a business, franchise, or professional practice can be one of the most important aspects in the process of buying a business. Not too many buyers have all cash for a purchase and not many business owners are willing to take back a sizeable note. Since there are approximately 32 different factors that go into the decision making process for an SBA loan, potential buyers need to be prepared well in advance with the information below to increase the odds of getting an SBA loan or a commercial loan.

Most borrowers also don't realize that all lenders are different in their criteria for SBA loan requests, and that their criteria is always changing! Lenders look at many different things in both the business buyer (borrower) and at the business, franchise, or professional practice that is being purchased. Below are some key factors that make a difference whether you will receive SBA loan financing to buy a business.

1. Buyers need between 10% - 30% for a down payment depending if there is real estate with the business or if just the business is being sold by itself. The down payment can come from many different sources: savings, equity built up in your home (home equity line of credit or 2nd on your home), a gift (usually from only family members), or retirement plan (401K, Pension, IRA etc.). You CAN NOT borrow the money or utilize a credit card for your down payment!

2. Buyers need to have good to excellent credit. Any bankruptcies or many late payments will usually nullify the chances of a borrower no matter how good the other criteria looks. Get any "dings" in your credit history removed or fixed well before the buying process. Early in the lending process, the lender will be running a credit check to see if you qualify.

3. Lenders like a borrower who has experience in the business they are buying or in a related industry, or with specific job skills relating to the business they are buying. Lenders also like management experience or buyers who have previously owned a business (self-employment) and know what it takes to grow and keep a business on track. You will need to provide a resume or description of your work experience. Have one ready that focuses on your industry strengths and management experience.

4. History of earnings (revenues) both total annual revenues and adjusted net income should have a either be flat or growing over the previous three years (no one wants to finance a business on a downward trend). If there have been any downward trends in earnings over the previous three years there should be a very good explanation or the deal will probably not be approved for financing.

5. Buyers should write up a mini business plan on the business they are thinking of buying. Lenders usually require this to make sure you know about the business and industry you are buying into and what you are going to do with the business once you buy it. These plans can be a short outline (3-8 pages) where the business has been, what is happening with it now, and what you plan to do with the business once you buy it.

6. Positive cash flow (or adjusted net income) must cover the debt service of the loan and provide you with an adequate income to live off on, otherwise you won't get the loan. Lenders look closely at the tax returns of the business being sold - so if the seller is playing any games (not showing income, excess deductions, etc. on his business tax returns) chances are you won't get a loan. Ask for the business tax returns early in the process of looking at a business and see if you can "add back" sufficient net income, depreciation, interest, and owners salary (adjusted net income) to pay back the loan. Also, cash flow analysis by lenders is very different than by business brokers, agents, or business owners.

7. Does the buyer have equity in any real estate that can be attached to the loan? Although not imperative with many of the lenders we represent, this can strengthen the deal if the other parts of your loan application are weak such as the down payment, work experience or a lower credit score.

8. Does the business that's being sold have management in place or key employees who are going to stay? Try to get commitments from existing key personnel and management to stay for a period - this shows the lender continuity and less risk after you take over.

9. Make sure there is adequate training after the sale of the business. Lenders look for a training period to be anywhere from 2 months to 12 months from the seller (depending on the type of business you are buying and your past work experience and how it relates to the business you are purchasing). Make sure you negotiate this point carefully in the purchase agreement.

10. Will the seller take back a note? If the owner is willing to take back a note (even a small one for 10%-20%) this shows the lender that the owner is confident in the deal and is willing to take a chance on the buyer. Also many times the note taken back by the owner will be on a stand-by basis meaning the owner will get limited payments for a certain time period. This insures that there is sufficient cash flow to cover the debt service (note).

11. Lenders will also want to know if you have any other outside sources of income i.e. other business income, income from a spouse's employment, rental properties, investment income etc. You will also need to provide 3 years of current personal tax returns.

12. The loan process takes anywhere from 24 to 60+ days - it really depends on you. The quicker you get info and forms back to us, and how available you are to answer any questions we or the lender may have will depend on how quickly the loan will be processed. If you want a loan processed quickly, be prompt with all info and make sure you are accessible by voicemail, cell phone, or email.

13. Deal structure is critical in most financings. You need to structure the deal (and price it right) before submitting your package. Only 30% of all submitted SBA loans submitted direct to lenders for business purchase financing are funded.

Our success rate is well over 90% because of the way we assist in and structure deals for our clients before submission and because of our long working relationships with many of the more professional and aggressive SBA loan and commercial financing lenders and financial institutions.

© Peter Siegel, MBA - All Rights Reserved

http://www.BizBuyFinancing.com

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About The Author: Peter Siegel, MBA is the President of BizBuyFinancing. Established since 1991, BizBuyFinancing specializes in obtaining SBA Loans & Conventional financing nationwide for the purchase of small to mid-sized businesses. Loan sizes range from $400K to $5M. More SBA loan tips and information can be read on their SBA Loan - Business Purchase Financing Blog. For more information call BizBuyFinancing at 800-801-4413 or see their website at www.BizBuyFinancing.com

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