The Small Business Administration (SBA) continues to be the primary source of financing when buying a business in Texas.
Technically speaking the Small Business Administration loan is not a loan but actually a guarantee to a bank who actually provides the loan. It’s commonly referred to as an SBA loan due to the standard regulations imposed on banks who offer loans under the SBA program ( known as a 7A or 504 loan).
In today’s market an SBA Loan for the purchase of a business that doesn’t have real estate as part of the sale ( the business is typically located in a leased space) will generally have the following terms:
- 10 year amortization
- Interest rate of 2.75% over the prime lending rate, adjusted quarterly
- Buyer down payment equal to 15 – 25% of total business purchase price
- Bank will likely add adequate working capital to the loan for business operations
The bank will have substantial due diligence requirements. Both the buyer (borrower) and the business (seller) must be able to pass the banks due diligence requirements. The bank will want all business financial information to be correctly stated on the business tax returns.
The bank will also want the buyer to me certain requirements regarding credit score, no problems with student loan payments, no issues with child support or alimony payments, clear history of any criminal issues.
A very important element of getting approved for an SBA backed loan is the banks comfort level with the buyers ability to succeed in the business they buy. A core element is known as buyer’s “applicable skills”. Basically this means what in the buyer’s experience can be applied to the new business.
Most small businesses that sell for under $1,000,000 are purchased by individuals who will own and operate the business on a day-to-day basis. These SBA Loans are rarely used for “passive” investments.