Demystifying SBA Loans for Buying a Business or Franchise
The Small Business Administration (SBA) is widely known for its small business loan programs. The most popular is the SBA 7(a) loan, which can be used for a wide variety of purposes, including buying an existing business and opening a franchise. While there are many reasons to consider an SBA loan, they are often misunderstood as either complex, difficult to obtain, or slow to process.
The fact is, once you understand the basics about SBA loans, they may be your best bet for bringing you one step closer to your dreams.
What advantages do SBA loans offer over traditional term loans?
- SBA loans typically have lower interest rates because they are partially guaranteed by the U.S. Government.
- They also offer longer repayment terms than traditional loans. SBA business acquisition loan terms are usually 7 to 10 years.
- More capital is also available for SBA loans. Borrowers can take out as much as $5 million.
How do you qualify for an SBA loan? What are the requirements?
In general, in order to qualify for an SBA loan program, the business must be:
- Small by SBA standards
- A for-profit business
- Located and operating in the U.S.
- Have owner equity invested
The business cannot:
- Get funds from any other financial lender
- Engage in prohibited activities
Finally, proceeds of the loan must be used for an eligible purpose.
Can you use an SBA loan to buy an existing business?
SBA loans that are used to finance a change of ownership (e.g. business acquisition) require an equity injection of at least 10% of the total project costs. The seller debt can be used for up to half the required injection and must be on full standby for the term of the loan.
Equity injections can be either cash, cash borrowed from a personal loan, assets other than cash, or standby debt for the term of the loan with no payments of principal or interest.
Can you use an SBA loan to open a franchise?
The SBA Franchise Directory offers a list of all franchises and other brands that are eligible to receive SBA loans. In order to appear on the directory, a franchisor must submit all required documents, including their franchise agreement, in order for eligibility determination.
Anyone interested in buying a franchise can access the directory and find franchises listed by brand, SBA Franchise Identifier Code, and an indication whether or not an SBA negotiated addendum is needed.
Can the owner of a business for sale get pre-qualified for an SBA loan?
The owner can actually attract more buyers and speed up the sales process by getting their business pre-qualified for an SBA loan. To do this, the business owner needs to meet with an SBA-backed lender and ask if their business, along with an eligible buyer, meets their requirements.
In general, the lender can make this determination by reviewing the last three years of business's financial statements, including its tax returns, profit and loss statements and balance sheets.
How long does it take to get approved for an SBA loan?
Generally, SBA loans usually take 60 to 90 days to be processed. In some cases, this can be expedited to as little as 45 days. Much of the loan approval timeline can depend on the borrower. If all the necessary documents are provided and are in order, the process can move rather quickly.
What can an SBA 7(a) loan be used for?
Besides buying a business or opening a franchise, SBA 7(a) loans are flexible and can be used for a wide variety of business purposes. Rates are among the lowest available for business financing and terms can go for up to 25 years, depending on the purpose. Ultimately, how the loan may be used will depend on the lender. Just to name a few, here are some examples:
- Business acquisition (change of ownership)
- Franchise purchase
- Start a new business
- Working capital
- Refinancing existing debt
- Machinery and equipment
- Furniture and fixtures
- Marking and advertising
- Commercial real estate
- Remodeling and improvements
There are many options available for financing the purchase of a business. Business buyers can use not just one, but a combination of financing to fund their business. In many cases, the seller will carry part of the financing and the buyer will raise the remaining funds through an alternative option. If you’d like to learn more about SBA loans for buying a business, you can contact a participating SBA lender.