SBA loans—loans guaranteed by the Small Business Administration—are not just for mom and pop stores. If your business has less than $15 million in tangible net worth and $5 million in average, after-tax net income over the last two years, you may qualify as a “small business” for the SBA.
SBA loans are loans provided by banks and non-banks. A portion of the loan is guaranteed by the U.S. Small Business Administration. SBA lenders must comply with the SBA’s credit and operations guidelines. Experienced SBA lenders can be designated as SBA preferred lending partners (PLPs) and have delegated authority to lend under the SBA program (rather than having the SBA review every loan prior to funding.)
SBA loans can be a great fit for businesses looking to expand their operations, acquire other businesses, buy equipment or purchase owner-occupied commercial real estate.
SBA for Buying a Business
Using an SBA loan, you can acquire another business, acquire a franchise, and even buy out a business partner. Maturities out to 10 years are available.
Read about a successful Speritas SBA loan for a pizza restaurant acquisition.
SBA for Business Expansion
There are many ways to use SBA loans to grow your business, including:
Increasing working capital: An SBA loan can give you the working capital you need for a variety of expenses – accounts payable, increased staffing, inventory and supplies, with terms of up to 7 years.
Purchasing equipment: You can use an SBA loan to purchase or lease equipment, machinery, furniture and more. With an SBA loan, you can finance your equipment with terms of up to 10 years.
Making leasehold improvements: Renovating your space is also a good purpose for an SBA loan up to 10 years.
Buying commercial real estate for your business to occupy: An SBA loan can be a great way to purchase commercial real estate for your business. Your business must occupy the majority of the square footage of the building. Self-storage and hospitality are exceptions to the owner-occupied rule and are eligible for financing. Real estate loans have maturities up to 25 years.
SBA loans can be used to purchase a business along with its real estate. In this case, the maturity of the SBA loan will be a weighted average of the business and real estate property values.
What do you need to qualify for an SBA loan?
SBA guidelines require the borrower to contribute at least 10% of the total project cost. This should come from cash or savings and in some cases from home equity lines of credit. A combination of seller financing and an SBA loan can make up the other 90%. Seller notes often have to be on subordinated to the SBA loan and on “standby” for a period of time.
Strong cash flow
SBA lenders look for steady or increasing pre-tax earnings, adjusted for interest and non-cash items like depreciation and amortization. SBA lenders “underwrite” potential loans with a debt service coverage ratio of 1.25, meaning that earnings must be 1.25 times the amount of annual principal and interest payments.
If you’re acquiring a business, you need to have relevant experience. That experience could be in the same industry as the business being purchased or could be more general business management. A seller transition period can help when experience is limited.
Your business and personal credit must be relatively strong. Most SBA lenders require a credit score of 680 or above. SBA loans can be arranged with credit scores as low as 600 but this is more difficult. A personal guarantee is required from at least 1 owner with 20% or more ownership.
Personal Financial Strength
SBA lenders are generally required to take all business assets as collateral. For loans over $1 million, the lender is required to put a lien on the personal real estate property of all 20% or greater owners. The business and personal assets combined with the business cash flow factor into the SBA lender’s calculation of whether you can pay back the loan.
Speritas Capital works with several preferred SBA lenders and can help you determine if your business or acquisition meets the SBA loan requirements. We can identify the right lender, help tell your story, and lead you through the documentation process.
Learn more about SBA loans by reading our online SBA 101 White Paper.
Visit our SBA Loans Frequently Asked Questions (FAQ) page.
You need a strategic, cost effective solution to your financing needs and a funding partner you can trust. Let us put our decades of banking and structuring experience to work for you – contact Speritas Capital Partners about your eligibility for an SBA loan today.