Dreaming of expanding your business but worried about the financials? Well SBA loans are here for you. These U.S government-backed financial instruments are widely becoming popular amongst entrepreneurs looking to acquire an existing business and expand their empire.
But how does one go about getting one? What are the eligibility criteria? Are they even the right instrument for you? Read on as we take you through all things SBA loans.
Understanding SBA loans
The Small Business Administration (SBA) is a U.S. government agency that supports and empowers small businesses and budding entrepreneurs. Unlike traditional banks that lend money directly to businesses, SBA works only with approved lenders to offer loans and financial assistance with favorable terms and lower risk. And, in this case, when it comes to business acquisitions and expansion, the most chosen option is the SBA 7(A) loan.
Designed for various objectives, including buying existing businesses, SBA 7(A) loans offer low interest rate, longer payment terms, and smaller down payment requirements. Sounds like a dream? Well, there is a catch. To be eligible for an SBA 7(A) one has to meet specific and stringent standards and requirements that convince the lender of your creditworthiness.
Are you eligible for an SBA loan?
Qualifying for an SBA loan are dependent on you successfully meeting the following criteria:
- Creditworthiness
A strong credit score of 680 and above shows lenders you’re reliable and disciplined when it comes to repaying debt. Thereby increasing your chances of getting an SBA loan. - Down payment
Most SBA lenders require a minimum deposit or down payment of 10-20% of the business’ purchase value. In case of shortage of liquidity, one can leverage personal savings and assets to cover the difference. - Business financials
Not just yours but also that of the business you intend to purchase. Lenders will take a microscope and examine its tax returns, profit margins, and cash flow before considering approving you for an SBA loan. - Experience and qualifications
Lenders will look into you and your background. They will check whether you have sufficient industry experience and knowledge and assess if you are capable of running the business successfully before lending you any money. - Debt-to-income ratio
Your personal and business debt and income affects your ability to make SBA loans payment. Therefore, a healthy debt-to-income ratio is a green flag.
The Next Step – Creating a Business Plan
Okay, so you have figured that you are eligible for an SBA loan. But that’s just the first step. In order to convince lenders, especially government-backed ones, to fund your business acquisition you will need one more thing – a SOLID business plan. Here’s how you make one –
- Executive summary
Usually a few pages gives a clear overview of the business you intend to purchase. It highlights its history, your vision for its growth and expansion, and why you believe this business has the potential to reap rewards and give the lenders a good ROI. - Financial projections
Clearly detail out revenue, expenses, and cash flow forecasts. Lenders don’t speak English, they speak numbers. And nothing better than seeing a business that can generate enough income to cover your SBA loan payments. - Market analysis
In-depth research of the industry and competitors. Explain why you have a competitive edge over the current players. Show how you plan to seize the market opportunity and capitalize on it. - Operations plan
Clearly lay down how you intend to manage the business, including staffing, day-to-day operations, and any other plan you intend on implementing. Clarity of thought shows confidence. Confidence increases the chances of SBA loans being approved. - Risk assessment
Be completely honest about the potential challenges and hurdles you expect to encounter. Also details of your strategies for overcoming them. Lenders value transparency and problem-solving abilities.
SBA Loan Application Process
You have identified the business you want to acquire. You have checked your eligibility, and you have created your business plan. Now comes the big one – applying for SBA loans.
- Pre-qualification
Begin by identifying an SBA-approved lender and discussing your needs in detail. The lender will then assess your eligibility based on your credit score, financials, and the business’ viability. - Documentation
Keep the following documents ready –
a. Personal and business tax returns
b. P&L statements
c. Current and historic balance sheets
d. Business valuation report
e. Detailed business plan - Business valuation
SBA approved lenders require a professional valuation to determine the business’ worth ensuring the SBA 7(a) loan amount aligns with the business’ value. - Loan underwriting
Once the SBA 7(a) loan application is submitted, the lender will conduct a thorough review. This includes evaluating and analyzing your business plan, your financials, and the business’ potential risks. - Approval and closing
Once the lender complete their evaluation of your application and deems you eligible, you will sign the SBA 7(a) loan agreement and finalize the purchase of the business.
Valuation Considerations: What is the True Value of a Business?
One of the most crucial steps of the acquisition process is the valuation of the business. Both you and the SBA-approved lender need to be convinced the business is worth investing in. Here’s how you can be certain –
- Methods of valuation
There are namely three methods of valuation widely used –
a. Income-based Approach: Focuses on the prospective business’ earnings and profitability.
b. Asset-based Approach: Focuses on the value of tangible and intangible assets.
c. Market-based Approach: Compares the business with other similar businesses recently acquired in order to determine the rue value. - Professional appraisal
Enlist the services of an unbiased, independent business appraiser to evaluate the business basis, its financials, assets, and market position. - Watch outs
Keep an eye out for declining revenue, outdated equipment, or unresolved legal issues. All these affect the valuation and the approval of your SBA 7(a) loan.
Why are SBA Loans the Smart Choice?
SBA loans, specifically SBA 7(a) loans stand out because of –
Lower interest rate: Lower than traditional bank loans
Longer repayment periods: Up to 10 years for non-real estate purchases
Smaller down payments: As little as 10% of the business valuation makes it accessible to first-time buyers.
Conclusion
Acquiring a business is a big decision, and SBA loans are capable of making it happen. If the process of acquiring an SBA loan is done with due diligence and patience, the reward, i.e. owning your dream business, will be well worth the effort.
So, go ahead. Take the first step in your entrepreneurial journey. An SBA 7(a) loan may be the last thing that stands between you and success.
