Using an SBA Loan to Finance an Acquisition

For entrepreneurs looking to acquire a business but lacking the necessary capital, a loan from the Small Business Administration (SBA) can be a powerful financing tool. The SBA doesn't issue loans directly but guarantees a portion of them, making it easier for small businesses to secure funding from traditional lenders.

Why Use an SBA Loan for an Acquisition?

• Better Rates and Terms: Because the SBA reduces the risk for lenders, they can offer more competitive interest rates (often under 8%) and longer repayment terms (7-25 years) than conventional business loans.
• Lower Down Payment: SBA loans typically require a lower down payment (often around 10%), reducing the amount of upfront capital the buyer needs.
• Reduced Collateral Requirements: For smaller loans (under $350,000), collateral may not always be required, though a personal guarantee is standard.
• Support and Resources: The SBA has a vested interest in the buyer's success and provides counseling and learning resources to support them through the acquisition process.

The Process for Getting an SBA 7(a) Loan:

The 7(a) loan is the SBA's most popular program and is ideal for acquisitions, offering up to $5 million.

1. Find an SBA-Approved Lender: Use the matching tool on the SBA's website to find suitable lenders in your area.
2. Prepare Your Application: Be prepared to provide extensive documentation, including:
   • Business Plan: A detailed plan outlining your post-acquisition strategy and why the target is a good fit.
   • Financials: Personal and business tax returns, balance sheets, and P&L statements to prove you can repay the loan.
   • Experience: Evidence of your industry expertise.
   • Credit History: While the SBA is more flexible than traditional lenders, your credit history will be reviewed.
3. Negotiate the Terms: The interest rates, fees, and collateral are all negotiable with the lender. Do not be afraid to negotiate for the best possible terms.

Important Considerations:

• Plan Early: The SBA loan process is bureaucratic and can take several weeks or months. Start the application process as soon as you identify a potential acquisition target to avoid losing the deal to another buyer.
• Variable Rates: The interest rates on 7(a) loans are typically variable, meaning your monthly payment can change over the life of the loan.