Financing Your Business Acquisition with an SBA 7(a) Loan

If you want to buy an existing small business and are looking into financing options, a Small Business Administration (SBA) loan might be the ideal fit for you. These loans are backed by the SBA, a part of the U.S. federal government that partners with lenders to help small businesses receive funding.

The SBA reduces lender risk by guaranteeing the loans up to 85 percent, allowing lenders to take more chances on small businesses. Through SBA-backed loans, new small business owners can gain access to financing that they otherwise might not receive through conventional loans.

The 7(a) loan is the SBA’s primary business loan program and can be used for a variety of small business needs such as purchasing real estate, obtaining working capital, refinancing debt, and purchasing machinery or equipment. The loan can also be used for a new owner to acquire a small business, which the SBA refers as a change of ownership.

Benefits of an SBA 7(a) loan for a business purchase

SBA 7(a) loans offer numerous advantages when compared with conventional loans. They are designed to be affordable for small businesses, and they can be easier to qualify for—which is ideal for small business owners.

These loans offer competitive terms, typically with lower interest rates and fees than other types of loans. The loans typically do not have financial covenants or balloon payments associated with them.

SBA 7(a) loans also offer large amounts, up to $5 million. They also offer long repayment terms—up to 10 years, and even up to 25 years if over half of the loan is allocated to real estate. A longer term means you will have a lower required monthly payment, which will open up your cash availability. That could free up money to reinvest in continuing to grow your business.

The loans also offer flexible overhead requirements and are typically more flexible with equity and collateral requirements. Some collateral might be required for SBA 7(a) loans, but typically not as much as conventional business loans, and in some cases, none at all. These loans also require a lower down payment, and you might be able to finance up to 90 percent of the total costs of your business acquisition.

SBA 7(a) loan qualifications for buying a business

Businesses must meet certain requirements stipulated by the SBA in order to qualify for an SBA loan.

First, the business must be an operating business, and it must be operating for profit; nonprofits do not qualify. The business must be located in in the U.S. and it must be considered a small business according to the SBA’s size requirements, which are detailed on the SBA’s website. There is also a list on the site of certain types of businesses that do not qualify for SBA loans.

The SBA stipulates that the small business must not be able to obtain the desired credit on reasonable terms from non-federal, non-state, and non-local government sources. Finally, the small business applicant must be creditworthy and demonstrate a reasonable ability to repay the loan.

If you are looking to purchase a business franchise, you can use an SBA 7(a) loan to buy a franchise business as long as it meets the other requirements.

What you'll need to apply

If your business meets the SBA’s qualifications, you’ll need to be ready to demonstrate to the lender why you should receive an SBA 7(a) loan to purchase an existing business. Lenders will want to see the financial history of the small business you wish to acquire, as well as your business plan and projections for the business. They will want to see how you plan to spend the loan money and make sure you will be able to repay the loan in due time.

The lender will also look at your personal financials, so you will need to demonstrate that you have good credit, business experience, and equity in the business.

If collateral is required, you will need to have assets available for that. Collateral for an SBA 7(a) loan can include tangible items such as real estate, furniture or equipment. Non-tangible assets can include cash, inventory, or accounts receivable. Personal assets of the business owner can also be used as collateral.

A down payment, also known as an equity injection, may be required for 10 percent of the loan, and perhaps more based on the riskiness of the business. You can use personal savings, money from an investor or perhaps even business assets.

To apply for an SBA 7(a) loan to buy an existing business, you will need to gather all of the business documents for the application. These include tax returns from the last three years, a profit-loss statement, a balance sheet, debt schedule, and the letter of intent to purchase the existing small business. You will also need personal documents including your tax returns and a personal financial statement.

Finding the right lender

You will need to find the right lender for your business acquisition loan. When looking for a lender who offers SBA loans, ideally you want to work with an SBA Preferred Lender, one who is part of the SBA’s Preferred Lender Program (PLP).

A preferred lender like Live Oak Bank is able to get the capital you need quickly. Live Oak can approve your loan without going through the SBA first, which shortens the approval time. SBA loans through Live Oak are typically approved three to four weeks faster than with non-PLP lenders.

Also check to ensure that the lender has significant experience helping small businesses secure SBA loans. Live Oak Bank, for example, has guided thousands of small businesses through the SBA loan process. Live Oak also offers deep industry knowledge through in-house teams that will guide you through the loan process efficiently to help you avoid costly mistakes.

Look for a lender who specializes in small businesses and one who will continue to support you well beyond the loan approval. A lender can offer you support as your business faces challenges and grows. Through its Business Analyst Group, Live Oak Bank offers service and know-how throughout the life of the loan.

Be sure to find a lender who is just as invested in the future of your newly acquired small business as you are.