5 Things to Know About SBA Loans for Buying a Business

Small Business Administration (SBA) loans can be a valuable tool for business buyers looking for financing. They’re partially guaranteed, which makes them less risky for lenders and more likely you’ll be approved. However, to set yourself up for success, you must do your research before making a final decision. To simplify this process, this guide will share five things to know about SBA loans for buying a business.

The Top Things You Should Know About SBA Financing

When deciding how to finance a business, SBA loans come up frequently. Here are a few things you should know before you apply for an SBA loan.

1. You Need to Be Qualified (So Does the Business)

You must meet certain requirements to be approved for an SBA loan. Luckily, the SBA’s latest Standard Operating Procedures (SOPs) aim to make loans more accessible to rising entrepreneurs. These updated guidelines should simplify and expedite the loan acquisition journey for small businesses.

However, it’s still important that the business you’re purchasing meets the SBA’s size and industry standards and has a solid financial history. In general, eligible businesses need to be for profit, do business in the U.S., and have reasonable owner equity to invest. The SBA has a list of ineligible businesses, though sometimes special circumstances can be applied.

2. You’ll Need Documentation

The SBA requires you to provide various documentation in order to be approved for a loan. This will give lenders an idea of your personal financial situation and ability to repay the loan. You’ll also need to retrieve certain documents from the seller. Documents you’ll likely need to provide include:

• Letter of intent
• Confidentiality agreement
• Tax returns
• Business license
• Documentation of assets
• Business and personal financial statements
• Sales agreement
• Business contracts and lease agreements

3. SBA Loans have Pros and Cons

SBA loans can be a great tool, but like any financing option, they have advantages and disadvantages.

Some pros of SBA loans include:

• Partial guarantee
• Longer repayment terms
• Flexibility of use
• Access to SBA resources

Some cons of SBA financing include:

• Length of application process
• Amount of required documentation
• Need for personal guarantee or down payment

4. There Are Different Types

Different types of loans are available, each with its terms and requirements. The 7(a) loan is the most flexible and basic type and can be used for various purposes, including buying an existing business. The SBA also offers 504 Loans, Express, International Trade, Working Capital Loans, and more.

5. You’ll Need to Make a Down Payment

The SBA generally requires a down payment of at least ten percent. This serves as collateral and helps reduce the risk for lenders, making it more likely for them to approve the loan. The amount required will vary depending on the loan and lender, the type of business you’re purchasing, and your credit history.

Still Not Sure How to Finance Your Business?

Are you venturing into a new opportunity? If you’re still on the fence about using an SBA loan to buy a business and need help exploring your other options, reach out to our team! Our brokers have the industry knowledge and expertise to assist you in purchasing a business with the most suitable financing option. Find a Sunbelt office near you today to get started!