Financing The Purchase of a Small Business
There are three primary ways to finance the acquisition of a Business:
- Buyers funds (may include friends and family loans)
- Seller financing
- SBA 7A loans (SBA 504 loans must include acquisition of the related real estate)
Most Buyers use personal savings, family financing, home equity loans, and/or 401K funds to partially fund a business transaction. Buyers should expect to inject 20% to 75% of a purchase price into an acquisition.
Seller financing is common, but in many cases the Seller will only finance (lend to Buyer) 20% to 50% of the purchase price, and as the loan amount increases in size, additional security, besides the business assets, will be required by the Seller (usually real estate).
SBA 7a loans are available through commercial banks, many which have an SBA division or specialist. Typical SBA loans are in the range of 50% - 75% of the purchase price. The lender/bank makes the loan, and the SBA “guarantees” 75% - 90% of the loan. The SBA has specific guidelines that the lenders must adhere to and lenders also have their own set of requirements. All SBA lenders are not alike – there is a great range of “special” requirements amongst various lenders, and a wide range of expertise among their SBA specialists. SBA lenders/banks seem to come and go in and out of the lending market, as the economy or SBA lending guidelines change.
Due to the constant changes in the SBA Lender environment, obtaining an SBA “guaranteed” loan can be very challenging. However, ABI has immediate access to some of the best lenders and lender professionals in the industry. The ABI Advisor will frequently have their businesses “pre-qualified” for an SBA loan to ensure the business financials meet the requirements, prior to putting it on the market. Once there is serious Buyer interest, that buyer will also go through a “pre-qualification” process to ensure a good match.
The ABI Advisor will guide both parties through the business financing of each transaction to ensure a smooth process.