If you’re looking to buy an existing business, including a franchise, you should seriously consider an SBA loan, which offers favorable repayment terms and a relatively small down payment. Here’s a look at how to use an SBA loan to buy a business.
The Small Business Administration (SBA) was established in 1953 to provide assistance to small businesses in the U.S.
One of the main ways it serves this purpose is by providing SBA loans, which can be used to purchase an existing business, among other objectives.
The SBA doesn’t actually loan entrepreneurs money, it merely guarantees loans provided by traditional lenders.
It is an important tool for any acquisition entrepreneur looking to buy an existing business or franchise.
How to get an SBA loan for your franchise
The process for getting an SBA loan to purchase a franchise is fairly simple to lay out but a little more complicated to implement.
You should first check your business qualifications as lenders usually require at least two years in business and a good credit score. There are also several program specific requirements depending on what type of loan you want to apply for.
You should also make sure your franchise is on the SBA Franchise Directory.
Next you’ll want to find a lender and begin to gather your financial documents before submitting your application.
Advantages of an SBA loan
The two main advantages of using an SBA loan to buy a business are favorable repayment terms and a small down payment.
First, most SBA loans have a 10-year amortization period compared to 3-5 years for a traditional bank loan. This will let you stretch your capital with lower payments.
SBA loans also charge lower rates than traditional lenders. It all depends on who much you borrow but for 10-year loans of $50,000 or less the rate is prime plus 2.75%.
Second, most banks will ask for 20-30% down for a loan but the SBA requires as little as 10%.
Requirements for an SBA loan
The requirements for obtaining an SBA loan are fairly straight forward.
The business must be considered small, generally defined by the SBA as having less than 500 employees and less than $7.5 million in sales.
It must be a for-profit business, be based in the United States and the owner must have equity in it.
The business cannot get any other funds from a financial lender and cannot engage in certain prohibited activities such as gambling, lending or real estate investment firms.
Use an SBA loan to buy an existing business
You can absolutely use an SBA loan to purchase an existing business. The most common for this purpose is the 7(a) program, which allows you to access up to $5 million in financing.
Loans that are used to finance a change of ownership require at least 10% in equity. Seller financing can be used for up to half of this amount.
Can I open a franchise with an SBA loan?
You can purchase a franchise with an SBA loan, however, you should check with the SBA Franchise Directory to see if it is an approved business. If it is not, you are out of luck.
You can also have an existing franchise added to the list but the franchisor has to submit the appropriate paperwork for review by the SBA.
Can a business pre-qualify for an SBA loan?
The owner of an existing business can pre-qualify for an SBA loan by meeting with an SBA-backed lender to ask if they, along with their prospective buyer, meet its requirements.
This can help speed up the sales process and attract more buyers.
The owner of an existing business will likely be asked to submit three year’s worth of financial statements, including tax returns, profit and loss statements and balance sheets so the SBA can review.
How long does it take to get approved?
This will ultimately depend on a number of factors but in general applying for an SBA loan takes longer than using a traditional lender.
For most loans, the SBA usually approves within seven to 10 days, however, the lender will likely take several weeks to make a decision. This is due in large part to the extensive financial documentation that is necessary to receive an SBA loan, including up to three years of personal and business tax records, a business and loan history and a credit report.
The whole process takes between 60 to 120 days.
What can be done with an SBA 7(a) loan?
The 7(a) loan program is the most popular type of SBA loan and can be used for several business needs, including:
- Purchase or expand a business, including a franchise
- Start a new business
- Repair existing capital
- Refinance debt
- Purchase furniture, fixtures, supplies or machinery
- Marketing and advertising
- Remodeling and improvements
A 7(a) loan can range from $30,000 to $5 million. Business owners should have good credit and business history to qualify.
Repayment terms usually don’t go past 10 years for most loans and 25 years for real estate loans. In general, the SBA asks for 10% down on 7(a) loans.
If you’re looking to purchase an existing business or franchise, you should strongly consider applying for an SBA loan.
The process can take longer than using a traditional lender but the favorable repayment terms and low down payment amounts make it an ideal choice for savvy acquisition entrepreneurs.
You’ll want to make sure that your franchise is already in the SBA Franchise Directory and that you have your financial documents in order.
An SBA 7(a) loan is an ideal path to help achieve your financial goals.
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