Advantages of Buying an SBA Pre-Qualified Business
SBA backed lenders help Business Buyers acquire existing, cash-flowing businesses. Buying an existing business often has advantages over start-ups and new franchises, such as existing cash flow, established customer base, trained staff in place, and proven systems and processes. There are distinct advantages of buying an SBA pre-qualified business.
Many businesses don’t qualify for SBA backed loans. Only about 10% of the businesses for sale on the market today have been SBA Pre-Qualified. Check BuyBizFL.com for pre-qualified businesses in Florida. Pre-Qualified means that an SBA backed lender has taken a first look at the business and believes that it would consider providing a business acquisition loan to a qualified Buyer. Some businesses currently on the market have not yet been pre-qualified and may also be eligible. However, many businesses don’t have the records, earnings, or other qualities that fit the banks’ requirements.
There are a number of SBA programs but the 7A remains one of the most popular. See SBA.gov for more details and other programs. The 7A program depends more on cash flow of the business, and less on the value of the tangible assets and real estate.
Advantages of an SBA Loan:
- Low down payment allows a buyer to put down only 10% to 25%
- Loan is spread over long period, usually 7 to 10 years
- Interest rates vary but our last few deals have been 6% or less
- You don’t have to have a perfect credit score – some banks will accept 640
- Banks will conduct detailed research on the company you acquire*
- Use your retirement savings (401K, etc.) for down payment**
- *Conduct your own Due Diligence on the business you are buying, even though banks do a detailed job checking out the business.
- **If you use your 401K or other retirement program that allows you to avoid penalties and taxes, confirm that the plan you use is in strict compliance with the IRS guidelines.
- Understand that banks will require you to use your home as part of securing the loan (unless you don’t own a home, of course, and yes, they lend to people who do not own homes or real estate).
- Not all banks are the same. Talk to a number of banks until you find the one that is right for you and the business you plan to acquire.
- Just because you have a relationship with a bank does not mean that they will grant you an SBA-backed loan.
- Other types of loans are possible sometimes. Do your research and find the best deal for you.
- Yes, you have room to negotiate with many banks.
Below is just a quick comparison and only shows projected cash flow for year one but allows you to compare three scenarios for a $300,000 business acquisition:
- All Cash
- Seller Financing w 60% Down
- SBA Lender Financing.
Payments and cash flows will change over time. Return Ratio here represents the return of cash you receive compared to the amount you put down. It does not consider bank and other fees. SDE is the owner benefit of the business before making any loan payment. Remaining shows owner benefit after making bank payment.
Always carefully compare all bank loans with the support of your professional lending, legal, and accounting experts.
|All Cash||Seller Fin||SBA|
|% Seller Holdback||0%||0%||0%|
|$ Seller Holdback||$-||$-||$-|
|$ Amount Financed||$-||$120,000||$240,000|
|Annual Interest Rate||0.0%||6.0%||6.0%|
|Monthly Interest Rate||0||0.005||0.005|
|# of Payments||0||36||120|
|Remaining After Loan||$125,000||$81,192||$93,026|
If you are looking to acquire a great business, take a careful look at SBA Pre-Qualified business. Among these, you will find many with great records and performance. A always make sure you conduct your detailed Due Diligence. Good luck on your acquisition.
Please reach out to us with any questions, or to request lists of SBA Pre-Qualified Businesses, SBA Lenders, or companies that can help you use your retirement funds to acquire an existing business.
Brian Stephens, MBA, CBI
Certified Business Intermediary
Legacy Venture Group
Business Sales and Acquisitions