Acquire Business With SBA 7(a) Loan Program
One of the most popular ways to become a business owner is to acquire an existing business. And the easiest way to qualify for financing is through the SBA 7(a) program.
Before I highlight the advantages of the 7(a) program, I’d first like to raise the point that acquiring an existing business is not always the best route to becoming a business owner. In some cases it makes better financial sense to start a new business rather than acquiring an existing one.
Here’s the test I like to apply. If you’re able to start a new business with similar or less capital requirements, and ramp up revenue and profitability within two years from opening, it’s likely best to start a new business.
If this is not the case, you can confidently focus all your attention on finding the right business to acquire.
Here’s some advantages to acquiring an existing business.
You’ll start with…
- An existing customer base
- Revenue stream
- A recognizable Brand
- Leased office space
- Furniture, fixtures and equipment etc.
Ironically these can all be disadvantages as well, which is why it’s important to conduct due diligence prior to waiving the financing contingency.
Next, you’ll need to secure capital for the acquisition. There are basically three ways to raise capital; self fund from cash reserves, align yourself with equity partners or apply for debt.
Most entrepreneurs don’t have a cool mil in the bank so they’ll need to pursue either equity or debt. There is a time and place for both but debt is the best choice in most cases.
Debt is cheaper, allows the borrower to retain 100% ownership of the company, and once the loan is paid in full it’s gone forever. On the other hand, equity partners own a percentage of the company, will want to participate in decision making, will drain cash flow and will never go away until they’re paid in full for their investment, rightfully so.
For those who choose debt, they’re now faced with the daunting task of finding the right lender that will offer them the best rates and terms for which they qualify.
The first challenge, however, is that most borrowers seeking a commercial loan don’t know what they qualify for, never mind which lender is the right choice.
How about conventional financing? Is that an option? I can confidently say that most people will not qualify for conventional financing to acquire a business.
As a former VP inside one of America’s most highly respected publicly traded commercial banks, I speak with authority when I say that the minimum liquidity, net worth and real estate collateral thresholds are simply too high for most borrowers.
On the other hand, the SBA 7(a) loan program makes qualifying much easier.
Here are my top 10 reasons why the SBA 7(a) program is the best option to finance the acquisition of an existing business.
- SBA loan rates are competitive with conventional rates
- The minimum capital injection is 10% instead of up to 25%
- The seller may contribute up to 5% of your 10% minimum capital injection
- SBA guarantee fees may be financed instead of paid out of pocket preserving precious operating capital
- The loan is amortized over a 10 year period lowering monthly payments to increase cash flow right from the start
- There is no prepayment penalty so pay as much as you want as often as you want
- There are no financial covenants or burdensome annual documentation review requirements
- Typically you’ll be able to choose your depository bank instead of being required to bank with the lender who approves your loan
- When the business and real estate are both for sale, there is the ability to combine the business acquisition with real purchase into one loan amortized up to 25 years
- And may I say the best reason is that you get to work with me Ryan Smith. I live and breathe to help individuals achieve their personal and professional goals through business ownership
My SBA Loan Pro
The My SBA Loan Pro Podcast is hosted by Your SBA Loan Pro, Ryan Smith. In each episode Ryan provides valuable information and best practices regarding the SBA loan program.
Each episode is approximately one minute in length and addresses topics related specifically to SBA 7(a) and 504 loan programs to purchase real estate, acquire a business or franchise and obtain working capital.
You’re encouraged to listen and subscribe to ensure you’re notified each time a new episode is available. Ryan publishes a new episode weekly on Tuesday mornings, unless he’s kidnapped to a deserted island of course.