The Business Owner’s Cheat Sheet – Starting and Selling a Business with an SBA Loan

Generally, starting a business with an SBA loan is incredibly hard due to no historical track record of cash flow and ability to service the debt. Banks are looking for at least three years in business before extending credit. However, it’s possible if you find a bank that is willing to do startups. Many banks are comfortable with certain franchises due to proven concepts that have been successful over an extended period of time.

The SBA 7a loan is the loan of choice for startups due to the 10 year repayment and the ability to use the loan for working capital. Here’s what you need to maximize your success:

  • A detailed business plan showing the opportunity, how your business will solve a problem that exists in the marketplace and how your business will differentiate itself from the competition.
  • A sources and uses of funds showing owners equity (at least 20%) as one of the sources and how the funds provided by the lender will be used.
  • A cash flow projection for at least 3 years with the first two years detailed month to month.
  • Three years of personal tax returns and three years of business returns for any affiliated business you own at least 20% or more of.
  • A personal financial statement that shows where the equity will come from and potential assets that will secure the loan if there are insufficient business assets to secure it.

If you’re selling a business to an insider or outsider and the buyer is looking for financing, the same SBA 7a loan can also be used for the acquisition. A similar package is needed for the acquisition, but the business plan is not needed because of the historical track record of the business. However, there are a few things you must know to insure your success:

  • The SBA loan must fund what ever is needed for the buyer(s) to obtain 100% of the stock. No partial buyouts and no staged purchases.
  • Most banks are looking for at least 20% equity. There are some rare cases where the bank will accept 10% in cash with the remaining 10% in the form of a subordinated note to the SBA loan until it’s repaid. The 10% in cash can’t be borrowed.
  • The lender will require an appraisal to be sure the purchase price is supported by an appraisal just like a real estate purchase.
  • In an asset purchase, the purchase price is in excess of the market value of the assets. So, goodwill is created to account for the remainder of the purchase price.
  • The lender must put forth “best efforts” to fully secure the loan with margined collateral to include the goodwill, personal assets are typically pledged in addition to the business assets.

Part of your success will be to find lenders that are willing to do startups and business acquisition loans. There are some lenders who don’t. In addition, you will dramatically reduce your approval time if you use an SBA preferred lender. These are lenders who have received SBA’s proxy to provide a simultaneous approval for the SBA when the bank approves the loan. If you have any specific questions, please contact us to ask your question.

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