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The Small Business Administration

The Small Business Administration

Most business buyers in New Jersey, even those who are in a position to do so, do not want to pay cash for a business acquisition.  They want to finance a significant part of the purchase.  Over the past several months, Crown Business Brokers sold a childcare center for $550,000 all cash and an auto repair business for $330,000 all cash, but that was unusual.

The Small Business Administration, or SBA, is an agency of the U.S. Department of Commerce.  Its purpose is to make capital in the form of loans more accessible to small business.  There are many misconceptions about the SBA, so let’s debunk a few of them.

The paperwork is insurmountable. This is a myth.  It is substantial, but any motivated business buyer can deal with it usually without much professional help.

It takes forever to close an SBA loan. This is also a myth.  An SBA loan can be closed in six weeks, assuming both buyer and seller focus on providing the documents and answering all questions in a timely manner.

The SBA makes loans. This is another myth.  Banks make the loans in accordance with SBA guidelines.  A certain percentage of the loan, say 70%, is guaranteed by the SBA.  Banks are very careful to not have the loans “go south” because if there are too many defaults, the SBA revokes the bank’s SBA lending authority.

I need collateral. Generally speaking, with conventional lending, the loan must be fully collateralized.  With the SBA, however, under the 7(a) program, funds to purchase a business can be secured with only the business’ cash flow.  Yes, they do like additional collateral.  But a strong buyer, i.e., one with good credit, a significant down payment (20-25%) and industry experience, can procure financing without additional collateral.  In many cases, a loan can be procured with less than 20% down.

The SBA likes some seller financing. This is true.  It shows that the seller has confidence in his own business.  The SBA also requires that in most cases the seller forego any payments for two years subsequent to the closing.  Seller financing is always legally subordinate to bank financing.

If you are a New Jersey business buyer, be sure to go with a Preferred SBA lender.  These are lenders who have demonstrated a proficiency in processing and servicing SBA loans.  In N.J.  two major SBA preferred lenders are TD Bank and Chase Bank.

 


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