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SBA Business Acquisition Loans: Fixed & Variable Rates

SBA Business Acquisition Loans: Fixed & Variable Rates

The experience of BizBuyFinancing in business purchase financing over the past two decades has meant working with all types of lenders and financial institutions while helping clients get the funding needed to complete their business purchases. In addition to helping buyers get prequalified, we've been instrumental in creating and executing the business prequalification strategies for sellers who want the market advantage of offering a business for sale complete with a bank ready to finance the deal for a qualified buyer.

Part of the education we provide to clients includes information that helps them understand where the money might be coming from to help them capitalize on good business for sale opportunities. And how to get it.

Business buyers and sellers working with BizBuyFinancing become well informed about topics such as the following:

A greater role has been assumed by the Small Business Administration in the marketplace where entrepreneurs go for business acquisition financing. Although the federal agency has worked with approved lenders to provide SBA business loans needed for business purchase and expansion since the 1950s, the SBA has stepped up its participation, particularly in the last three years, with its 7(a) and 504 lending programs. In an attempt to overcome the "lending freeze" that resulted from the financial crisis of 2007 and 2008, Congress made more money available--through the Federal Recovery and Reinvestment Act in 2009, and the Jobs bill passed and signed in the fall of 2010--for the SBA to provide incentives for lenders and borrowers to use its programs. As a result, the agency has seen record levels of loans made to small businesses, with a total of more than $15 billion in loan approvals granted during the first nine months of fiscal year 2011.

The SBA does not ordinarily make direct loans, but provides government guarantees for loans, made by bank and other financial institutions in its lending network. Typical amounts range from a $ to $5 million. All government-backed loans must meet the agency's loan criteria.

Funds provided under the SBA loan programs are earmarked for specific small business uses. Buying an existing company usually qualifies, provided the transaction will, in the estimate of the lender, benefit the company. The SBA wants to see a company continue doing business past the retirement of its current owner--particularly if the new owner will expand, adding more employees and generating more tax revenue. What the agency does not care to support is a loan requested by a business owner to pay off debt, or to fund the purchase of a part interest in the company.

The variable rate loans made available through SBA guarantees usually are set for repayment in a minimum of 10 years and up to 25 years. In most cases they are secured by assets of the business, including equipment, furnishings, and inventory. The asset of goodwill, usually given a value in a business purchase, is not ordinarily accepted as collateral for the SBA 7a loan purchase. Some goodwill might be included in the purchase agreement that will be funded with SBA-guaranteed money, but the agency has imposed limitations on the amount of a purchase price that can be allocated to goodwill, for purposes of the loan application.

There also may be real estate used as collateral if the lender requires it, and that might include the business real property or even non-business property owned by the borrower. Rates of interest are set at the prime rate published by the Wall Street Journal plus a maximum of 2.25% for loans maturing in less than seven years, and prime plus a 2.75% maximum for loans of seven-year duration or longer.

Fixed rate loans are more commonly used when funds are applied in part or entirely to the acquisition of real estate in connection with a business. This type of loan accounts for most of the longer term--up to 25 years--lending supported by the SBA. Interest rates vary by lender or financial institution.

Cash flow is a primary consideration of SBA lenders. A SBA business loan request that can be fully secured with real estate and other capital assets but without a clearly specified source for the funds needed to pay it off is not likely to be approved. Conversely, a loan application has a good chance of receiving the green light if there is inadequate collateral to secure the full loan amount, but the borrower can demonstrate to the lender's satisfaction that there will be ample cash flow from the business (and perhaps the borrower's other income sources) to discharge the obligation.

Requirements imposed by the SBA, if it is to guarantee a loan, include good credit rating of the borrower and the likelihood that the business will generate the funds needed to satisfy the SBA loan, when it is operated by the purchaser. BBF's important role here is to "package" both the business and the borrower so the loan application clearly demonstrates how the obligation will be discharged with cash generated by the business under the buyer's management.

Another key SBA requirement concerns the deal structure, the amount of the down payment, the percentage of the price--if any--that will be carried back by the seller and the plans for the buyer to support other debt incurred in purchase of the business. The full list of requirements can be obtained from an SBA-backed lender or from a professional loan specialist familiar with SBA fixed and variable loans.

Buyers and even sellers interested in tapping the resource of lenders ready and able to help fund a business transaction have come to BizBuyFinancing over the past 20 years to take advantage of our successful two-step process. The Professional Prequalification program (the first step) prepares a buyer/borrower to enter the business for sale market ready to make a commitment and in a good negotiating position because sellers and their intermediaries know the buyer's offer is backed up with pre-arranged bank support. The range of services involved in our step two include finding the best available funding source among our network of hundreds of lenders and financial institutions, then "packaging" both the business and the borrower so the application is most likely to be approved.

While SBA-backed loans are much more accessible today than they were in prior years, and have been responsible for helping to fund thousands of business sales transactions in the past several months, some objections have been raised to the idea of seeking an SBA loan for a business purchase. Various myths about SBA lending persist, and should be dispelled for the benefit of buyers and sellers looking for business acquisition financing.

The five most common myths include:

  • It takes too long to get an SBA-backed loan. Comment: A fully prepared loan package can be approved in a few days if presented to a lender not backed-up with dozens or hundreds of loan applications in the queue. The best way to beat the problem of "too late to meet loan contingency deadline" is to work with a niche specialist like BizBuyFinancing who knows how to package your application so that it's approval-ready; and then to make sure it's submitted to a lender or financial institution who can respond to it quickly.

  • Requirements of the SBA are too difficult to meet. Comment: Surprisingly, most lender requirements now are at least as demanding as those established by the SBA, particularly in recent months following the banking crisis and lending freeze. An applicant whose request is rejected may simply not know how to answer some of the questions, or may not know how to provide answers in a way that assure loan application approval.

  • There's just too much paperwork involved in applying for an SBA loan. Comment: SBA-backed lenders typically don't require any more forms or information than do commercial lenders. Don't be intimidated by the application. It's not much different than what you'll be required to deal with regardless of which lender you chose when planning to buy a business.
  • SBA rules require everyone who wants a loan to put up equity in their house as collateral. Comment: Actually, commercial lenders are more concerned with getting sufficient collateral than are banks in the SBA lender network. You will have to satisfy SBA's requirements, however, when it comes to demonstrating that the cash flow will be there to pay off the obligation. All lenders and financial institutions vary on their collateral requirements.

  • There is so much competition for SBA-profile loans that I don't stand a chance of actually getting one. Comment: Thanks to support from Congress providing more resources for the SBA Loanso it can promote lending for small businesses, the agency is guaranteeing more loans now than it has for several years. But in order to achieve a loan approval, you need to know--or work with a niche specialist who knows--how to get the favorable attention of lenders and financial institutions (who like cash flow deals) that have the money and are looking for your kind of business acquisition project to fund.
"We just closed on our new business. Thanks for all your help and guidance throughout the loan process. Our first attempt at getting financing through ..."
- M. Monahan, Buyer

"I wanted to take a moment to thank you for your assistance in locating SBA financing for my acquisition of the company I just purchased. You not only ..."
- W. Burton, Buyer

"I appreciate your prompt response time on being able to contact bank credit managers direct and obtain loan terms so quickly. I know the alternative r..."
- K. Schmidt, Buyer

"I wanted to write a quick note and let you know how much I appreciate all your help in finding a lender for my business purchase. Your were attentive ..."
- D. Denczek, Buyer

"Before I came to BizBuyFinancing (referral from a business broker) I went to many banks for my gas station purchase and most of them couldn't see the ..."
- Abdul M., Buyer

"BizBuyFinancing recently helped me secure a $1.2 million SBA loan for the purchase of this company. Without a doubt, they were instrumental in my succ..."
- A. Grimalda, Buyers

"When I originally envisioned selling my interest in the company to the other stockholder, I was very concerned in carrying a large note back, since he..."
- M. Petersen, Seller

"Since this was the first business I had ever tried to sell, I soon learned that there is much more involved in selling a business than just finding a ..."
- J. Johnson, Seller

"Early in the process of searching for and writing an offer on several FedEx delivery routes many lenders told me they couldn't fund such deals. I just..."
- Yun T.

"Great job! My deal/loan was being botched by another lender I had selected who didn't really care and was going to fall through because of their unpro..."
- Dr. P. Darvas, Buyer

"Your loan funding Total Pre-Qualification & Guaranteed Loan Program has been an extremely valuable and a value added service. Anything to help qualify..."
- K. Kramer, Broker

"Yesterday we successfully completed the sale of our business, a hardware store, to buyers from Dublin Ohio. We would like to take this opportunity to ..."
- G. Duffy, Seller

"First let me let you know it was a positive feeling of knowing you were in my corner looking out for my interests in the 3 deals we looked at getting ..."
- S. Mehra, Buyer

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