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The SBA and Financing Your Business

So you’ve found the business you want to purchase and have negotiated price and terms with the seller. Now the next issue is financing! I’ve written about the SBA before, but here I would like to provide more detail as regards what you can expect in applying for a loan. The list is not all inclusive but it does highlight all of the important issues that you will need to address in applying for an SBA loan. Remember, the SBA does not lend money; banks lend money and the SBA guarantees the loan.

First you are probably going to need a deposit of at least 15%, although 20-25% is preferred. The down payment also cannot be borrowed but it can be a gift. If it is a gift, you will need a letter from the donor stating that the funds provided are in fact a gift and that there is no obligation to repay. If you are using funds that are not a gift, the bank will want to see your bank statements for the past several months to ensure that you have owned the funds for a period of time.

Second, you are going to need tax returns for the business you are buying for the past three years as well as your personal tax returns. Small business tax returns often have hidden income to the seller, and you and the seller are going to have to be able to explain this to the bank loan officer.

Third, you will need to prepare a business plan outlining how you plan to grow the business; it does not have to be long, three to five pages will suffice, but it should be well written and well thought out. You should include a resume indicating that you have experience in the type of business or industry that you are investing in.

Fourth, you are going to need a variety of insurances i.e. flood, property and casualty, and fire. Be prepared to provide proof of coverage to the bank.

Fifth, you will need to form a new entity to purchase the assets of the business; this entity must be in good standing at the time of closing. The bank will want a copy of the formation document.

Sixth, the bank will probably have an outside valuation firm value the business. If the valuation is less than the agreed upon price, the seller is going to have to accept a lower price or you are going to have come up with more cash. As regards seller financing, the banks like it because it shows that the seller has confidence in the continuation of the business. The bank will require that the seller forego receiving payments on the loan for a period of two or three years, and the seller financing will be legally subordinate to the bank.

Seventh, if you own a home, the bank is going to want it as collateral. They may want other collateral as well depending upon the nature of the deal.

Eighth, the bank is going to want your personal financial statement; this shows your assets, liabilities and net worth. Be as accurate as possible because if your credit report shows liabilities that were not disclosed in the personal financial statement, you are going to have quite a bit of explaining to do.

Ninth, the bank is going to want a copy of an asset purchase agreement signed by both you and the seller before they will consider the loan. If you are leasing property, the bank is also going to want a copy of the lease signed by both you and the landlord; the term of the lease must be equal to or greater than the term of the loan.

Finally, you are going to incur legal fees and SBA loan fees; these can run in excess of $10,000, so factor this into your acquisition budget

So good luck! It’s not as bad as it seems if you are organized and methodical. Crown Business Brokers is also available on a fee basis to assist you with your SBA loan application. We’ll prepare the application, do the business plan, and provide any guidance and assistance required with the exception of assistance that is legal in nature.


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