SBA Loan Financing For Business Purchases - 8 Items You Need To Know! |
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SBA loans are a great resource for financing when buying a business. Peter Siegel, MBA an expert on large SBA loan business purchase financing (loan sizes between $400,000 and $5,000,000) covers eight key points below when seeking SBA loan financing to buy a business.
SBA lenders look at many different items in both the business buyer (borrower) and at the business that is being considered for purchase. Below are critical key factors that make a difference whether you'll receive SBA loan financing to buy a business.
1. Potential business buyers need to have a credit score of over 600 - the higher the better. Personal or business bankruptcies or many late payments will usually nullify the chances (unless the BK has been discharged) of a borrower no matter how good the other borrower criteria appears. Get any "dings" in your credit history removed or fixed well before the buying process. Early in the lending process, the lender will be running a credit check to see if you qualify and if the debt service can be serviced by the cash flow.
2. Lenders like a borrower who has experience in the business they are buying or in a related industry, or with specific job skills relating to the business they are buying. Lenders also like management experience or buyers who have previously owned a business (self-employment) and know what it takes to grow and keep a business on track. You will need to provide a resume or description of your work experience. Have one ready that focuses on your industry strengths and management experience.
3. History of earnings (revenues) both total annual revenues and adjusted net income should have a either be flat or growing over the previous three years (no one wants to finance a business on a downward trend). If there have been any downward trends in earnings over the previous three years there should be a very good explanation or the deal will probably not be approved for financing.
4. Positive cash flow (or adjusted net income) must cover the debt service of the loan and provide you with an adequate income to live off on, otherwise you won't get the loan. Lenders look closely at the tax returns of the business being sold - so if the seller is playing any games (not showing income, excess deductions, etc. on his business tax returns) chances are you won't get a loan. Ask for the business tax returns early in the process of looking at a business and see if you can "add back" sufficient net income, depreciation, interest, and owners salary (adjusted net income) to pay back the loan. Also, cash flow analysis by lenders is very different than by business brokers, agents, or business owners.
5. Does the buyer have equity in any real estate that can be attached to the loan? Although not imperative with many of the lenders we represent, this can strengthen the deal if the other parts of your loan application are weak such as the down payment, work experience or a lower credit score.
6. Does the business that's being sold have management in place or key employees who are going to stay? Try to get commitments from existing key personnel and management to stay for a period - this shows the lender continuity and less risk after you take over.
7. Will the seller take back a note? If the owner is willing to take back a note (even a small one for 10%-20%) this shows the lender that the owner is confident in the deal and is willing to take a chance on the buyer. Also many times the note taken back by the owner will be on a stand-by basis meaning the owner will get limited payments for a certain time period. This insures that there is sufficient cash flow to cover the debt service (note).
8. Deal structure is critical in business and franchise purchases . You need to structure the deal (and price it right) before submitting your package. Also remember all lenders are different in their criteria for every type of business being considered for business purchase financing. It is very important to go to the right SBA lender who won't waste your time in both the underwriting and processing stages of SBA loan financing.
Peter Siegel, MBA is a SBA loan financing consultant and SBA loan packager/broker for business purchase acquisition financing. He assists business buyers, business brokers, and business owners nationwide to obtain SBA loans and commercial financing on all types of business purchases priced between $400K and $5M. Working with over 25 lending institutions and because of his over 20 years industry experience, he offers his clients the lowest SBA loan interest rates, and most deals are financed in 24 to 32 days! He can be reached direct at 800-528-7718. |
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