Buyer Side: SBA Financing 101

Buyers in the purchase of a business have several options in obtaining financing to make the purchase, whether it is through a traditional bank loan, borrowing money from friends and family or through a Small Business Administration 7(a) loan (“SBA Loan”).  An SBA loan can be the perfect solution for either a first-time business owner or a mature business owner looking to get financing for the first time. 

Why an SBA Loan?

SBA loans provide looser requirements versus traditional bank loans, including the fact that the SBA guarantees the loan, offers longer repayment terms, and can have lower down payment requirements.  However, with those benefits, SBA loans can require more paperwork, additional scrutiny, and can include a personal guarantee, although more traditional loans also typically require that guarantee.  Generally, you would obtain an SBA loan from a traditional bank, which has a point of contact, a loan closer and the support staff to help in gathering all information and putting the documents together. At the start of the process, the lender will provide the buyer with a qualification letter in order to begin the lending process.

What do I need in order to get an SBA Loan?

The Lender, on behalf of the SBA, will require several items in order to obtain the loan, including but not limited to:

  1. Life insurance on the buyer in the amount of the loan;
  2. General liability insurance in excess of the loan amount;
  3. Worker’s compensation insurance for the business;
  4. Business personal property insurance for the business;
  5. Business interruption insurance;
  6. A list of all of the assets of the business;
  7. Evidence of a cash injection for the loan;
  8. Recent personal financials of the buyer/borrower of the business;
  9. Profit and loss statement of the seller; and
  10.  Various other personal information, including driver’s license copy, etc.

The Lender will also require certain legal documents in order to obtain the loan, including but not limited to:

  1. Formation documents of a purchasing entity, along with its “doing business as” trade name;
  2. Seller resolution approving the transaction;
  3. Asset Purchase Agreement or Equity Purchase Agreement;
  4. Bill of Sale; and
  5. Non-compete agreement.

Most, if not all, of these items are required by the SBA in order to obtain the loan.  As stated above, traditional bank loans may not require as many items; however, there are many benefits to an SBA loan.

What happens after I provide this information?

Typically, once most of the information and documentation are provided to the Lender, the Lender will schedule a Closing anywhere between five and twelve business days, depending on the lender.  With that scheduled, a settlement statement will be generated to show how the money will flow from lender to seller for the purchase price, buyer for any working capital, and to any other buyer’s engaged group, including the attorneys, accountants, closer, and any other individuals. 

Our Firm closes anywhere between eight and twelve deals a year that are financed through the SBA.  We act as attorneys for the buyers and help get the buyer to close.  This is in addition to other deals that we handle for buyers and sellers, which total 25-40 deals, annually.  Please reach out to us for assistance.

The lawyers of Musgrove Law Firm, P.C. are available to assist our clients with complex business; federal, state, and local income tax 2022; Mergers & Acquisitions; intellectual property; and real estate and estate planning matters among our specialties. Our goal is to be not only excellent lawyers but true business partners with our valued clients. Contact us today to schedule a consultation regarding your business and tax matters.