Celtic Bank Blog

Four Things SBA Lenders Wish Small Business Owners Knew to Help Them Get Approved for a Business Acquisition Loan

Planning on using an SBA loan for your business acquisition purchase? Great choice! But before you’re able to get that loan, you need to figure out how to get it approved.

Let’s look at what SBA lenders need you to know to maximize your chances of getting approved and getting your funding!

The importance of getting your credit in gear

As with other loans, your personal credit will have a major impact in your ability to get qualified for a loan. Make sure you’ve handled debt well and are making payments frequently and on-time. Avoid multiple credit inquiries on your name, and keep your debt service ratio low.

The industry you’re buying into

When you know the industry, you’re more likely to know the markets, run the business efficiently, and hire the right team to work for you. Which means your business has a better chance of thriving.

Generally, you should have 3-5 years managerial-level experience in your industry before buying your business. Lenders who see less than this may have concerns about your ability to run the business effectively and deny your loan application.

And what if you don’t have that minimum amount of experience? You may still qualify for the loan, but you’ll need to take some extra steps to convince your lender that you have what it takes to be successful. Presenting a strong business plan helps you do this. You can also show that you have other experience that will transition well to your new business, such as:

  • managerial or executive experience in other industries
  • sales, marketing, or accounting backgrounds
  • apprenticeships
  • other hands-on experiences where you had similar job duties

Which deal structures won’t work

Since the SBA is backing your loan, they set parameters in place to make sure the deal structures you’re setting up are strong. Before applying for your SBA loan, make sure your purchase is set up according to the following SBA lender guidelines:

 

Allowed Structures Not Allowed Structures
  • Full acquisition of business
  • All cash (SBA portion can be counted as "cash")
  • Cash (including SBA portion) + owner financing
  • Consulting agreement
  • Partial buyouts
  • Earn-outs
  • Performance-based financing
  • Employment Agreements
  • Long-term consulting agreement

 

A good rule of thumb is this: if there’s something in the purchase contract that’s contingent upon the post-sale performance of the company, the SBA won’t fund it. In addition, if the contract includes high expectations for seller involvement, you won’t be able to use an SBA loan for it.

How you’re going to fund your down payment

Most lenders will require you to make a down payment on your business. This means you’ll need to find some funding outside of your business acquisition loan to purchase your business. Start by determining how much you’ll need to set aside, and then figure out where you’ll get that money from.

How much will my down payment be?

You’re more likely to take good care of your business when you’ve personally invested in it. Which is why SBA lenders require you to put your own money down on the business before they’ll invest.

The amount you’ll contribute will depend on your specific loan, risk factors, and other available collateral, but the average is 25%. Some loans require as little as 10% down, with most down payments being capped at 30%.

How will I fund my down payment?

There are a number of options for funding the down payment for your SBA loan. We’ll go over each briefly, along with their pros and cons:

Personal savings: If you use the money from your savings, you won’t have to worry about an additional loan, and it looks good to lenders when you’re able and willing to invest from your own pocket. However, make sure that you leave enough in your savings to cover expenses in case of an emergency.

Retirement Rollover for Business Startup: Often referred to as the ROBS method, rolling over your retirement money for buying a business can save you loan costs and interest. And because you’re using the money to start up a business, you won’t face the excessive taxes or penalties that normally come with an early withdrawal. Because the tax and legal implications that come with an ROBS can be tricky, you’ll want to do this with the help of a professional ROBS provider.

Home Equity Loans (HEL): Home equity loans and home equity lines of credit (HELOC) have low interest rates and easy terms, making them an appealing option for your down payment. Keep in mind, though, that any loans taken against your house reduce the amount of equity available to for you to use as collateral on that house and that your payments for the HELOCs may increase over time if the rate for your line of credit isn’t fixed.

Owner financing: Owner financing allows a seller to provide financing to help the buyer pay for the business. The buyer purchases the business at a percentage of the cost, then pays back the difference to the original owner over a set period of time. While seller financing doesn’t technically count toward your down payment, it can help leverage it.

Other outside loans: You could take out a smaller loan to pay for the down payment. Some people have friends and family members who are willing to loan or even gift money toward the new business. Others turn to personal lending providers. With loans from personal lending companies. Watch out for high interest rates, and remember that you’ll have an additional payment to worry about each month once you do receive your loan.

Once you’ve mastered these four things, you’ll not only be in better shape financially to apply, but you’ll have answers prepared to help overcome any weaknesses in your application.

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