For over a decade working with business buyers seeking for SBA loan we found that there is a great deal of confusion regarding the qualifications and the loan fulfillment process. Business buyers usually have a very vague idea of what is required to get SBA loan for buying a business.
Most people know that the loans are provided not by Small Business Administration (SBA), which is government organization, but by private banks. SBA secures these loans in case of default, thus reducing the risk of lending money to small businesses. Ideally, lenders should generate loans left and right and ask you to take their money, however, in reality the picture is quite opposite. Since Great Recession, lenders are very cautious with lending money and it definitely hurts business selling market.
So, as a business buyer, what you need to know about getting an SBA loan?
In order to get an SBA loan the deal should pass four qualifications.
- Business buyer shall be a qualified borrower, i.e. good credit score, no recent bankruptcies, etc.
- Target business should generate enough profit for providing to the buyer and re-payment of the loan.
- Lender should have high level of confidence that this particular buyer will succeed after acquiring this particular business. Lender will be reviewing buyers resume looking for relevant experience. In the best scenario the buyer should have both industry and business ownership experience. One of these experiences probably would help too. Having none of relevant experience will, most likely, lead to rejection of the loan application.
- The amount of down payment should offset all risks associated with providing a loan. Theoretically, 10% down payment may be enough for the loan approval. However in reality you-re looking at 25-30%. The less qualifications comes from first three items, the higher down payment will be required.
Now you understand why pre-qualifying business for SBA loan doesn't make any sense. Target business may qualify for a loan with one buyer and doesn't qualify with another buyer. Only passing all four qualifications listed above may reasonably guarantee obtaining SBA loan.
Want to maximize your chances of getting a loan? Knowledgable business broker should be able to help.