Acquiring a Business with an SBA Loan: What To Know
Acquiring a business is one of the fastest ways to become an entrepreneur or expand an existing company in the United States. However, buying a business often requires significant capital. One of the best financing options available is an SBA (Small Business Administration) loan. SBA loans offer favorable terms, lower interest rates, and longer repayment periods compared to traditional loans.
Today’s blog post provides an overview of the process, how to work with banks, and key insights for anyone looking to fund, start, or grow a business through an SBA loan.
Understanding SBA Loans
The SBA doesn’t directly lend money. Instead, it guarantees a portion of loans issued by approved lenders, reducing their risk and making it easier for borrowers to secure funding. It’s very similar to the way home mortgages work. The U.S. government provides funds to lenders that then lend the money to prospective homeowners.
In the case of SBA loans, the most commonly used loan for business acquisition is the SBA 7(a) loan.
Why Use an SBA Loan?
Low down payment: usually around 10%-20% of the purchase price.
Longer repayment terms: up to 10 years for business acquisitions.
Lower interest rates: typically tied to the prime rate + a small margin.
Flexibility: can be used for business acquisition, working capital, or refinancing debt.
Key Requirements to Qualify
A strong credit score (typically 680+).
Sufficient cash flow in the business being acquired.
A reasonable down payment (often between 10%-20%).
Industry experience or transferable business skills.
Collateral (not always required but can improve chances).
The SBA Loan Process: Step by Step
1. Identify a Business to Acquire
Start by looking for businesses that match your expertise, interest, and financial capacity. Consider businesses with:
Strong cash flow and profitability.
Recurring revenue and a solid customer base.
Documented financials (tax returns, profit and loss statements, etc.).
Low dependency on the owner for operations.
Sites like BizzBuySell (https://www.bizbuysell.com) and Search Funder (https://www.searchfunder.com/) provide a good starting point to look for potential businesses.
2. Conduct Initial Due Diligence
Before securing financing, ensure the business is viable. Analyze:
Financial statements: review profit and loss, balance sheet, and tax returns (at least 3 years).
Debt and liabilities: understand outstanding debts, leases, or legal issues.
Customer base and contracts: look for long-term agreements or recurring revenue.
Operations and employees: assess key staff and whether they will stay post-acquisition.
Companies selling their business don’t always have this information readily available. Sometimes they are not organized as you’d like, sometimes they want to know you are serious buyer before they provide more information.
3. Work with an SBA-Approved Lender
Finding the right lender is key. Some banks specialize in SBA lending and are Preferred Lenders (PLP), meaning they have faster approval times.
Prepare a strong business plan: lenders want to see how you will operate and grow the business.
Show financial stability: your personal and business financials must show the ability to repay the loan.
Discuss loan terms: interest rates, loan structure, repayment terms, and collateral requirements.
4. Get a Letter of Intent (LOI) or Purchase Agreement
Once you’re serious about a business, negotiate a Letter of Intent (LOI) or draft a purchase agreement. This document outlines:
Purchase price and payment structure.
Terms and conditions of the sale.
Transition period details (if the seller is staying temporarily).
Lenders will require this before they move forward with underwriting as an LOI is usually used as proof that both parties are serious about moving forward.
5. Submit Your Loan Application
Your SBA loan application package will include:
A completed SBA loan application form.
Personal financial statement.
Business tax returns, ideally 3 years.
Profit & loss statements and balance sheets.
Business plan with projections.
Purchase agreement or LOI.
Collateral documentation, if required.
Once submitted, expect underwriting to take 4-8 weeks.
6. Loan Approval & Closing
Once approved, you'll receive a commitment letter outlining final terms. Then, the lender will conduct final due diligence, including:
A business valuation.
Background checks on the buyer.
Final legal & financial reviews.
Upon closing, funds are disbursed to complete the acquisition, and you officially own the business.
Working with Banks: What You Need to Know
What Lenders Look For
A strong acquisition target: the business should have a history of profitability.
Personal creditworthiness: lenders prefer borrowers with good credit and experience.
Seller financing: if the seller is willing to finance part of the deal (e.g., 10%-20%), it can improve approval chances.
Industry risk: some industries are considered higher risk, requiring stronger financials.
How to Make the Process Easier
Work with a lender experienced in SBA 7(a) loans.
Have a clear acquisition strategy and transition plan.
Prepare all financial documents in advance.
Be flexible and ready to negotiate loan terms.
Useful Knowledge as a Buyer
1. Be Prepared for a Personal Guarantee
SBA loans almost always require a personal guarantee, meaning you are personally liable for repayment if the business fails.
2. Seller Financing Can Help
Many lenders prefer when sellers finance part of the deal (e.g., a 10%-20% seller note), as it shows confidence in the business.
3. Business Valuation Matters
SBA lenders often require a third-party business valuation to ensure the purchase price is fair. If the valuation comes in lower than expected, you may need to renegotiate.
4. Post-Acquisition Transition is Critical
A successful transition plan (keeping key employees, retaining customers, and maintaining operations) is essential for success.
Final Thoughts
Acquiring a business using an SBA loan is a great way to enter or expand entrepreneurship with lower capital upfront. The process requires thorough financial due diligence, a strong business plan, and working closely with an experienced lender. By understanding how to navigate the process, you can increase your chances of securing financing and successfully taking over an existing business.
Notice that there is a down payment of 10% to 20%. If you were to onboard an investor that covers that down payment and gets equity in the business in return, you could potentially own a business with 0% down. This is a form of creative financing that we talk about in other posts.
On top of it all, you will need to know that the process of getting an SBA loan is only the first step into entrepreneurship. Meeting objectives and following a business plan becomes the next step into successfully running your business and becoming an entrepreneur. Make sure that you have the right resources to achieve this.
