At Advisor One, we believe that SBA financing provides the most benefits for our sellers including:
- No early balloon payments.
- Longer amortization schedule.
- One closing.
- Lower overall down payment.
- No “payable upon demand” clause.
- No prepayment penalty.
- SBA loans are assumable.
What Are the Qualifications?
Four factors play a fundamental role in your ability to acquire SBA financing: Cash, Credit, Collateral, and Character. First, you must have sufficient cash, commonly referred to as “equity” to arrange financing. Typically, this may be in the 10-30% range. Next, your credit must be excellent. Collateral may include stocks and bonds, 401K’s, investment real estate, and other assets as security for the loan. Finally, your character must be sound and your background must demonstrate the experience, education, and ability to be successful in your new business venture.
What Are the Credit Requirements?
- Management must have sufficient expertise in the field to operate the business.
- The business owner must have a reasonable amount of their own money invested in the business.
- Demonstrate that the past earnings record and probable future earnings will be sufficient to repay the loan.
- Owners must pledge sufficient assets to secure the loan.
- Owners, partners, principal stockholders, officers, and managers must be of good character.
What Type of Terms and Rates Are Available?
SBA loans range from 5 to 25 years depending on the type of loan and the allowed use. Rates range from prime plus a spread adjusted quarterly to fixed and variable rates with caps over prime depending on the type of loan.
The SBA Process
As a buyer, you can pre-qualify by providing the lender with personal financial information to assess your credit profile. Once you have decided upon a business and executed a contract, the lender will review the deal structure and make an initial internal inquiry to assess the interest by bank or institutional executives. When this is accepted internally, you and the lender complete the necessary SBA documentation to submit the loan. The seller will also provide tax returns and other key financial statements to support the process, and the loan officer then prepares the final package for submission to SBA. Once received by the SBA the package is reviewed and a response is given to the local lender. Often there are additional documents and conditions necessary to finalize and approve the loan. From start to finish this process can take as little as 6 to 8 weeks but may take as long as 12 weeks for completion.
Types of Businesses Financed by SBA
SBA generally favors asset-based businesses over businesses heavily valued with goodwill. At the same time, businesses with lower asset value but strong and progressively upward earnings receive considerable attention. Tax returns verifying income to owners and net profits are a necessity, as well as clean books and records. Businesses that have financials audited by CPA’s exhibit additional strength. There is no single list of desirable businesses, but the more stable the business with strong prospects for future growth, the better the view by the SBA.