How To Qualify For SBA Loan For Business Acquisitions

Aspiring entrepreneurs often face endless challenges and difficulties in obtaining much-needed financing from traditional sources of credit. 

Whether it’s due to bad credit or concerns about the viability of a business idea, securing financing can be challenging for acquisition entrepreneurs.

SBA loans offer an easy alternative with relatively low-interest rates and long repayment terms.

Established in 1953, the Small Business Administration (SBA) is a federal agency whose mission is to address challenges that small businesses face by advising and providing much-needed capital and contracting expertise.

Under the SBA, acquisition entrepreneurs can obtain various loans for specific purposes. 

For example, the 7(a) loan program suits people struggling to gain approval on traditional loans. 

Microloan schemes, on the other hand, are targeted at companies that require small amounts of capital under minimal conditions. The 504 Loan Program is a fixed-rate loan program.

Let’s look at the qualifications for obtaining an SBA loan for a business acquisition.

SBA Loan for Business Acquisition

SBA Loan vs. Traditional Loans

Many prefer SBA loans that are backed by the government for their flexible terms and low interest rates. These loans have longer repayment terms of up to 25 years. 

Traditional loans usually come with varying interest rates, loan amounts, and stringent eligibility requirements.

Because the federal government guarantees SBA loans, lenders offer them at much lower interest rates. don’t have as stringent minimum credit score requirements and can be accessed in 30 to 90 days if loan documents are in order. 

Traditional loans require a minimum credit score 580 for approval but can be accessed in a few days or hours.

SBA Loan Programs

There are several different types of SBA loans that small businesses and acquisition entrepreneurs struggling to access traditional loans can take advantage of.

The SBA 7(a) loan can be used for various purposes like equipment purchase or working capital, with a maximum amount of $5 million. Most importantly for our purposes, it is also used to purchase an existing business.

The Microloan program is for small businesses needing up to $50,000, often provided by nonprofit organizations for technical assistance.

The 504/CDC loan program offers long-term fixed-rate financing for real estate or equipment purchases, with up to $5 million available.

Community Advantage loans support small businesses in underserved markets and are provided by community-based lenders.

The Small Business Administration (SBA) establishes criteria that dictate how SBA loans are granted, defining which businesses lenders can support and the types of loans available. For acquisition entrepreneurs, these criteria are crucial in determining loan eligibility. Here are the key requirements lenders consider:

• Business Operations for Acquisition Ventures:
  • Must be a legally registered entity conducting operations with the intent to generate profit.
  • Should operate within an SBA-approved industry. Ventures focused on lending, speculative activities, gambling, or political and lobbying efforts do not qualify.
• Geographical Location:
  • The enterprise must be based and operational within the United States or its territories, underlining the SBA's goal of supporting domestic business growth.
• Owner's Investment:
  • Entrepreneurs must demonstrate a substantial investment of time and resources into their business, showcasing commitment and contributing equity.
• Demonstrated Need for Financing:
  • It's essential for businesses to exhibit a genuine need for funding, having sought other financial avenues prior to applying for an SBA loan. This involves:
    • Providing evidence of the need for loaned funds.
    • Justifying the loan request with a sound business purpose, particularly in the context of business acquisitions.

These guidelines are designed to ensure that SBA loans support viable, growth-oriented business acquisitions that contribute to the broader economic landscape.

Navigating the Hurdles of SBA Loan Approval for Business Acquisitions

Securing an SBA loan for business acquisitions, while beneficial, comes with its own set of challenges, despite the clarity of eligibility criteria. Acquisition entrepreneurs must prepare to tackle these hurdles head-on.

Complex Application Journey

The SBA loan application process is not for the faint-hearted, as it can be complex and time-consuming. Acquisition entrepreneurs must be prepared to submit extensive documentation to verify their eligibility. The thorough and lengthy process demands patience and meticulous attention to detail, reflecting the rigorous standards set by most SBA lenders.

Collateral requirements

While SBA loans typically favor collateral-backed applications, the lack of collateral is not an insurmountable barrier. Strong facets of the loan application can offset this. Notably, for SBA 7(a) loans seeking $50,000 or less, the collateral requirement is waived, offering some leeway for smaller acquisition endeavors.

Demonstrating Business Viability

For an acquisition to be financed through an SBA loan, entrepreneurs must convincingly present a viable, profitable business model. This is particularly challenging for those acquiring businesses that might not easily secure traditional financing. The ability to showcase the future success of the acquisition is crucial in navigating this obstacle.

Creditworthiness and Credit Score

A significant determinant of SBA loan approval is the credit standing of the business owner. Acquisition entrepreneurs with lower credit scores may face rejection. Banks and lenders maintain stringent credit requirements, often expecting scores above 600. Ensuring a strong credit score is therefore critical for improving the likelihood of loan approval.

For acquisition entrepreneurs, understanding and preparing for these challenges is key to successfully navigating the SBA loan application process.

Required Documents for SBA Loans

Due to the rigorous criteria and extensive documentation required for evaluation, obtaining SBA Loans can be quite challenging. Before submitting their applications, business owners need to ensure they have gathered the necessary documents.

Borrower information: You must complete the SBA Form 1919, which details all business information, including all officers, directors, and equity holdings.

Personal background and financial statement: In this case, you must fill out the SBA Form 912 and SBA Form 413 to provide an accurate detail of your financial status

Business Financial Statements: While applying, business owners must include the following documents to support their applications:

• Year-End Profit and Loss (P & L) Statement for the last three years
• Year-End Balance Sheet for the previous three years, including a detailed debt schedule
• Reconciliation of Net Worth
• Interim Balance Sheet
• Interim Profit & Loss Statements
• Projected Financial Statements

Applying for an SBA Loan

The process of applying for an SBA loan is straightforward:

Step 1: Identify Your Small Business Project

Determine whether you are starting up a business, opening a franchise, or buying an existing business.

Step 2: Determine the Finances Need 

It is essential to remember the amount of money needed depending on the nature of the business.

Step 3: Find an SBA Loan Lender 

Various SBA lenders are in the market. Therefore, one should conduct an in-depth analysis to settle on a lender who can issue the best terms for an SBA loan.

Step 4: Complete the SBA Loan Application Process 

Once you’ve identified a lender, make an application while providing all the required documentation depending on the loan you are applying for.

Step 5: Underwriting with the Lender 

Once an application is made, the SBA loan lender will review everything and decide on the application.

Step 5: Closing 

Once an application is reviewed and everything checks out, the lender is to release the loan amount with all the terms

Case Studies and Success Stories

One of the most successful stories on the use of SBA loans is JH Green & Son. The construction company made a successful application for a $350,000 SBA loan. 

As part of the application process, the company wanted to use the funds to buy equipment for business expansion and hire additional staff.

The company has since become one of the biggest construction companies in Hatboro, Pennsylvania, utilizing the most efficient construction methods and equipment to deliver value to clients while taking on significantly more projects

FAQs

Conclusion

A Small Business Administration Loan is a great financial resource for entrepreneurs struggling to secure traditional loans. 

Offered through participating institutions such as banks and credit unions, the loans come with better terms, lower interest rates, and extended repayment periods, making them ideal for small businesses trying to find their way in various sectors. 

The loans are helpful for multiple needs, including working capital, machinery and equipment purchase, land, building acquisition, and debt refinancing.

If you are interested in securing an SBA loan and need help figuring out what to do, look no further than Acquira. 

Our Accelerator course has everything you need to know about SBA loans and can help you purchase and operate a successful small business in as little as seven months.

Whether a seasoned entrepreneur or just starting Acquira will provide all the required assistance for a seamless application process.

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Key Takeaways

• SBA loans offer vital, low-interest financing options for small businesses.
• They stand out due to flexible terms compared to traditional loans.
• Understanding different SBA loan types and their requirements is crucial.
• The application process for SBA loans can be complex and lengthy.
• Good credit and business viability increase chances of SBA loan approval.

Team Acquira

Acquira specializes in seamless business succession and acquisition. We guide entrepreneurs in acquiring businesses and investing in their growth and success. Our focus is on creating a lasting, positive impact for owners, employees, and the community through each transition.