Financing a Business Acquisition With an SBA Loan

If you're an entrepreneur, you know that the first idea isn't always the one that hits it big. Success often comes from being a serial entrepreneur—always looking for the next opportunity. You might spot a business for sale that you know you could elevate, but there’s one problem: your cash is tied up in your current company. When this happens, don't let a lack of capital stop you. An SBA loan could be the key to financing that acquisition.

This is a common scenario for anyone with a primary career who is also exploring a responsibilities. Finding the right is often the biggest hurdle.

So, What Exactly is the SBA?

Think of the Small Business Administration (SBA) not as a bank, but as a federal agency that helps entrepreneurs get loans. It doesn't hand out money directly. Instead, it works with traditional lenders and guarantees a portion of the loan, reducing their risk and making them more willing to lend.

At its core, the SBA helps level the playing field for small businesses in the U.S. economy. This makes getting an SBA loan for an acquisition surprisingly straightforward. Even if you've been turned down for credit before or have a less-than-perfect financial history, you might still be in the running. However, you do need to meet a few key requirements:

• Your business must operate in the United States.
• You have to be a for-profit entity.
• You need to have some of your own money already invested in the business.
• You must show that you've tried and failed to get funding from other lenders first.

Why Use the SBA for Your Acquisition?

An SBA loan can be a lifesaver when other doors have closed, but its benefits go beyond being a last resort. For anyone serious about turning an idea into a real , these loans offer significant advantages.

Better Rates and Terms

Because the SBA is a federal agency focused on responsible lending, the interest rates are competitive, often staying under 8 percent. This structure protects you from the predatory practices you might find with some subprime lenders. Loan terms can range from seven to twenty-five years, giving you plenty of breathing room to make affordable monthly payments. With the SBA guaranteeing up to 85% of the loan, there's less pressure on you. You'll typically only need a 10% down payment, and for loans under $350,000, you might not even need to put up collateral, though a personal guarantee is standard.

More Than Just Money

Acquiring a business involves a mountain of due diligence and legal paperwork that can feel overwhelming. The SBA has a vested interest in your success and provides support along the way. You can access counseling and educational resources to help guide you all the way to the finish line, which is invaluable when you're of this magnitude.

How to Get an SBA Loan for Your Acquisition

The most common option is the general-use 7(a) loan, which is perfect for acquisition financing. You can borrow up to $5 million, which covers most small and medium-sized business purchases. Of course, you’ll only be approved for an amount you can realistically repay.

To start, visit the SBA website and use their matching tool to find a list of approved lenders in your area. From there, you'll need to apply directly with the lender. Be prepared to provide the following:

• A solid business plan explaining why this acquisition is the right move and what you plan to do post-purchase.
• Proof that you can handle the loan, including tax returns, balance sheets, and P&L statements.
• Details about your expertise in your current industry and, if different, the industry of the business you’re buying.
• Don't panic over a few blemishes; the SBA guarantee allows lenders to be more flexible.
• A breakdown of the assets (stock, property, etc.) you can use to secure the loan. This can be a key part of securing good .

A Few Things to Keep in Mind

Before you dive in, remember these three key points about using these specific .

1. Dealing with a federal agency isn't quick. The application process can take weeks, and funding can take even longer. If you’ve found a business you want, start the loan process immediately so you don't lose the opportunity.
2. The 7(a) loan has a variable interest rate tied to a base rate like LIBOR. This means your monthly payment can fluctuate over the life of the loan. Be prepared for those changes.
3. The SBA sets limits, but the lender will always look out for its own best interests. Don't hesitate to negotiate fees, repayment schedules, collateral, and interest rates, especially if you have a strong financial profile.

SBA loans offer fair terms and low rates, making them one of the best forms of available. If you own a business and are looking to acquire another, don't let a lack of capital hold you back from your next big move.