Obtaining small business purchase loans was nearly impossible at the height of the financial crisis. Bankers were so fearful of making risky loans that they were turning down solid proposals as well as the weaker applications. But with encouragement from the government, through the Small Business Administration, institutions in the SBA's lending network now are turning on the money spigot again. Meanwhile, California borrowers are learning how to submit approval-ready loan applications.
The SBA ordinarily does not directly loan money to businesses. Its role is to guarantee a substantial portion of each SBA-qualifying loan made by a participating bank, provided, of course, the borrower's application complies with the SBA requirements.
To get the green light, the request for small business purchase financing from an SBA-backed lender should include:
1. A logical business purpose: That means, for example, that a request for a loan to buy a company that is over-priced is not likely to be approved. Nor is an application involving purchase of a company--even at a low price--that does not seem to have good prospects for future success.
2. Sufficient collateral to secure the loan partially or in full: The lender will usually require a lien against the assets of the business, including any equipment, furniture and fixtures, and inventory. In many cases, the bank looks to additional buyer assets to further secure the obligation. That can involve other business assets, even equity in the borrower's real property.
3. Solid financial performance by the business to be purchased. Balance sheets, profit and loss statements, receivables and payables accounts ledgers, and bank statements, going back at least three years, represent the minimum amount of paperwork that should be provided. If the business has recently been impacted by the slowed economy but has a long history of success, it might be useful to provide information on business results going back five to seven years.
4. Financials of borrower. In addition to the data needed on the company, the proposed lenders want to see the balance sheet, and the income and expense ledgers for the individual (or individuals) requesting the loan. A credit check will certainly be conducted, and borrowers will need to have good credit records in order to be considered for the requested funds.
5. Experience of borrower/buyer: Older rules that were followed in the years before the mortgage meltdown often allowed an individual with general business experience to buy a company in an unfamiliar industry, and then get quickly up-to-speed on the particulars of the business. Most bankers using SBA loan programs won’t follow that logic. Newer SBA rules expect that someone requesting small business purchase loans will be able to demonstrate, with his or her resume, specific experience needed to operate the business successfully.
6. Business plan: Another way for the borrower to show he or she can successfully manage the target company is by providing a plan to operate the business. It should include specific strategies for building up the enterprise, increasing revenues and boosting profits. A marketing plan should also be included. And the budget projections included in the plan need to clearly describe how the borrower expects to generate enough money from the business on a consistent basis to make the loan payments.
While it's easier for California entrepreneurs to secure small business purchase loans than it was a couple of years ago--at least the money is available--it takes some know-how, and a considerable amount of work, to raise money with a successful loan application for one of the SBA loan programs.
About The Author: Peter Siegel, MBA is the Founder and President of BizBen.com and is a SBA Loan Consultant/Broker specializing in SBA loan financing for business purchases. He has coordinated SBA loans for business acquisitions and partner buy-outs since 1994 and currently works with over 20 national and local SBA lenders and financial institutions. Mr. Siegel provides SBA loan pre-qualifications and advises business buyers, business owners, and business brokers. He can be reached directly at 866-270-6278.