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If you're dreaming of buying your first business, securing financing can be one of the biggest challenges. Fortunately, the Small Business Administration (SBA) offers various loan programs that can help you achieve your goals. SBA financing is a popular choice among aspiring entrepreneurs because it offers flexible terms, low down payments, and the ability to finance a range of business types.
In this post, we’ll break down the essentials of SBA loans, explore different loan programs, and guide you through the application process. Whether you're purchasing an existing business, starting from scratch, or investing in a franchise, this guide has you covered.
What is SBA Financing?
The SBA does not directly lend money to businesses. Instead, it guarantees a portion of loans made by banks and other lenders. This reduces the lender's risk and allows them to offer more favorable terms to borrowers. SBA loans can be used to:
- Purchase an existing business
- Start a new business
- Buy a franchise
- Invest in real estate for your business
The key benefit is that SBA loans allow up to 90% financing for the total project cost, including the purchase price, working capital, and even employee salaries for the first few months. This makes it easier for first-time business buyers to get the funding they need without a huge upfront investment.
Types of SBA Loans
There are two primary SBA loan programs to consider:
SBA 7(a) Loan
The 7(a) loan is the most popular and versatile SBA loan. It can be used for a variety of business purposes, including purchasing a business, real estate, equipment, or working capital. Loan amounts are capped at $5 million, and terms can range from 10 years (for business purchases) to 25 years (for real estate purchases).
SBA 504 Loan
The 504 loan is specifically designed for businesses looking to buy major fixed assets like commercial real estate or equipment. It involves two loans: one from a bank and the other from a Certified Development Company (CDC). The SBA guarantees a portion of the CDC loan, allowing businesses to secure up to 90% financing.
Other Government-Backed Loans
If you’re in a rural area, you may also be eligible for USDA BNI loans, which support businesses in populations under 50,000 people. These loans offer similar guarantees and terms to SBA loans but are aimed at developing rural economies.
SBA Loan Case Studies
Let’s look at a couple of real-world examples of how SBA loans have been structured to help entrepreneurs purchase businesses:
- Marina and Restaurant Purchase: In one case, a buyer purchased a marina and restaurant for $2.1 million. The seller agreed to a 5% carryback, and a family member contributed $40,000, allowing the buyer to secure financing without using their own money. The buyer ultimately owned 48% of the business, with the seller retaining less than 20%, which meant they didn’t need to guarantee the loan.
- Franchise Startup (Mr. Handyman): This example involves a low-cost franchise startup, where the total project cost was $150,000. The SBA loan helped cover franchise fees, working capital, leasing a truck, and marketing costs. Though the borrower had low liquidity, they were able to secure financing by meeting post-closing liquidity requirements.
Loan Eligibility and Structuring
Down Payments and Seller Carryback
One of the biggest advantages of SBA loans is the ability to structure deals with a low down payment. Typically, a 10% equity injection is required, but a portion of that can come from seller financing (called “seller carryback”). This flexibility makes SBA loans ideal for buyers with limited cash reserves.
Collateral Requirements
Depending on the loan amount, additional collateral may be required. For loans over $500,000, lenders often require a lien on personal property if sufficient business assets aren’t available. However, if you don’t have collateral, it’s still possible to get approved, especially if the financials of the business you’re buying are strong.
Loan Terms
Loan terms vary based on the loan type and the asset being purchased. For example, a business acquisition loan typically has a 10-year term, while loans involving real estate can have up to a 25-year term. Importantly, SBA loans under 15 years have no prepayment penalties, giving you more flexibility in paying off your debt early.
The SBA Loan Application Process
The SBA loan process generally follows these steps:
- Initial Review and Pre-Approval: Once you've identified the business you want to buy, you'll need to provide three years of the seller’s tax returns, year-to-date financials, and a balance sheet. The lender will conduct a financial analysis to determine if the business can support the new loan payments.
- Term Sheet: After initial review, you’ll receive a term sheet outlining the loan terms. This is a non-binding agreement, but it’s an important step toward securing financing.
- Full Loan Package Submission: After the term sheet, you’ll need to submit additional documentation, including your personal financials, to complete the loan package. Depending on the complexity of the deal, SBA loans can take anywhere from three weeks to several months to close.
- Closing: Once all documentation is submitted, the loan will go through final underwriting and approval. Once approved, the loan is funded, and the business purchase is completed.
Conclusion: SBA Financing Opens Doors for First-Time Business Buyers
Securing SBA financing for your first business purchase may seem daunting, but it’s one of the most accessible and affordable ways to achieve your entrepreneurial dreams. With flexible down payment options, favorable terms, and the ability to finance a wide range of business types, SBA loans can help you get started with minimal upfront investment.
If you're serious about buying a business or investing in a franchise, exploring SBA financing could be the key to making it happen. For personalized advice and support in securing an SBA loan, schedule a consultation with a financing expert today!