The Financing Process

As part of the client services, we guide prospective buyers through the financing process, pre-qualify listings ahead of time, and can help with the preparation process to obtain financing. Contact us to learn more.

SBA Financing Information And Overview.

The US Small Business Administration (SBA) enables private lenders to make loans for buying a business by guaranteeing that a portion of the loan proceeds will be repaid to the lender in the event of a default by the borrower. SBA financing is the primary vehicle through which small business acquisitions are financed.

The most commonly used loan types are 7(a) and 504 loans. Due to its versatile nature, the 7(a) loan is the most commonly used type of SBA loan. Proceeds from a 7(a) loan can be used for nearly any legitimate business purpose, including buying a business, real estate construction and acquisitions, debt refinance, business expansions, business startups, equipment and working capital.

The term of a 7(a) loan is dictated by the use of proceeds. Prepayment penalties are non-existent for loans with maturities of less than 15 years and are extremely lenient for loans with longer maturities. Interest rates are nearly always variable and based on a spread over the Prime Rate.



The 504 loan program is intended solely for real estate and fixed assets such as heavy equipment. 504 loans provide for maximum leverage (up to 90% loan-to-value) with favorable terms, including maturities out to 25 years and relatively low interest rates which can be fixed for the life of the loan. 504 loans are also unique in that they allow for loan sizes up to $5 million (greater in some instances).

The structure of a 504 loan differs from typical loans in that it combines two separate loans. The first loan is a 50% conventional first mortgage that is not guaranteed by the SBA, and the second loan is a 30 – 40% second mortgage made by an independent non-profit entity known as a Certified Development Corporation (CDC). The CDC portion of the loan is 100% guaranteed by the SBA.

Cash Flow is King

All business acquisition loans are evaluated based on the historical cash flow reported in the business’s tax returns. The performance of the business subsequent to the most recent year’s tax returns is important, but your lender relies heavily on the cash flow reported in the tax returns to ensure that there is sufficient cash flow to repay the loan.

Your lender will also evaluate your personal financial situation to understand what your personal debt obligations are and how much money you need to withdraw, if any, from the cash flow of the business. Businesses with minimal or even negative cash flow can often still be financed if the borrower has a favorable personal financial situation.

Create a Business Plan

Even borrowers with extremely strong industry experience will be asked, at a minimum, to create financial projections that reflect their estimates of revenues and operating expenses after the business is purchased. Many lenders require all borrowers applying for a business acquisition loan to provide a business plan, regardless of experience.

Borrowers with less impressive resumes can attempt to mitigate their lack of experience by providing a thorough, comprehensive business plan that shows they have completed a substantial amount of due diligence on the business being purchased.

Experience is Important

Your lender will want to know why you’re qualified to own and operate the business you want to buy. If you don’t have experience owning, operating, or working within a similar type of business, you will need to make a strong case that you have professional experience that is “transferable” to your target business in order to qualify for SBA financing.

How Much Money Do I Need To Buy A Business?

Different lenders require different amounts of cash equity to be injected into the purchase of a business. Most lenders view the amount of equity required in terms of a percentage of Total Project Cost. Total Project Cost is equal to the sum of the (a) borrower’s cash injection, (b) amount of debt offered by the lender, and (c) amount of any third-party financing obtained in conjunction with the transaction (such as a seller note).

Total Project Cost usually includes closing costs. Most PLP lenders require between 10% and 25% of the Total Project Cost to be injected into a business acquisition by the borrower.

Some factors that typically decrease the required amount of borrower equity include:

• If real estate is included in the sale, “general-multi-purpose” (such as an office building or warehouse) is preferred, as opposed to “special use” (such as a car wash or marina).
• The borrower has a secondary repayment source for the loan other than the business purchased (such as a spouse or co-borrower with outside employment).
• Other collateral available to pledge (such as a rental property or securities)
• Significant industry experience or transferable experience
• The seller of the business carries a seller note.
• The business has a strong historical cash flow.

In general, it’s difficult to approximate the exact amount of equity a lender requires without having a conversation about the above issues. However, most business acquisitions that don’t include real estate normally require at least 20% cash equity. In some cases, lenders may approve a loan to a borrower who is injecting less if the right factors are in place.

Since the SBA has been changing its guidelines due to economic conditions, please visit their site for updates.

The SBA has its own “Personal Financial Statement” which must be completed. You can download a copy of it below.

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