The amount of information regarding SBA loans and business acquisitions is scarce and causing buyers and sellers to become frustrated.  The amount of misinformation is even more alarming.  The vast majority of problems have arisen from the substantial difference in each banks credit philosophy when it comes to business acquisitions.  I would venture to guess that only 5 of the several thousand active SBA lenders complete somewhere around 70% of all business acquisitions that use SBA financing to complete the transaction.  Let that sink in for a minute.  Please make sure you are working with a very experienced SBA lender who specializes in business acquisition financing.  

SBA lenders typically look at the seller’s information first and foremost to make sure the business is priced accordingly and there is enough cash flow to cover the loan payments.  The cash flow utilized by the lender to determine loan repayment ability can drastically differ in comparison to what is listed on the brokers write up or marketing materials.  Keep in mind that SBA lenders are required to use tax returns and you’ll find it very unusual that a lender will allow any undocumented addbacks.  SBA Lenders usually use EBITDA, officer’s compensation, and occasionally owner’s auto expense.  There are of course situations that make sense to use much more than this, but they will certainly never use unreported income (cash held off books) or outrageous seller’s expenses that are not a normal part of business- personal expenses like credit card spending and home renovations, etc.  Please keep in mind that the SBA essentially does not want lenders aiding and abetting tax fraud.  The cash flow used by a lender will typically be the same that a required third party appraiser will use as well so even if the deal has enough cash flow the appraisal also needs to support the purchase price.

Lenders will then look at the experience of the buyer.  This is likely the most important item a lender will consider when determining if they’d like to approve the loan.  The past experience of the buyer can greatly affect the underwriting.  Most lenders will like to see some relatable experience and a good rule of thumb is the more specialized the business the more direct experience will be required.  Certain aspects of the business being acquired can be mitigated with less than direct experience, such as the selling business being a franchise.  It’s good to really understand that SBA lenders like to see direct industry experience.

The buyer’s financial position will of course be reviewed as well.  The major points to consider are cash available for down payment, left over after the purchase, and where it’s coming from.  The other point would be income- does the buyer have other sources of income that can cover their personal expenses and debts?  Perhaps from a spouse or another business or maybe they’re able to retain their current position.  This doesn’t mean that if the buyer doesn’t have outside income the loan will automatically be denied, but the lender would look to the seller’s cash flow to cover the buyers personal expenses as well.  This could cause the cash flow to fall short and result in a denial.  Credit is a major factor as well, most lenders would like to see FICO scores over 650 and that all major blemishes were a minimum of 7 years prior with a clean credit history since.  A history of slow paying, judgements and collections will not be taken lightly by a lender.

SBA lenders that are truly business acquisition specialists will provide working capital and finance 90% of the total project costs.  The project typically consists of the purchase price, working capital, closing costs, and SBA fee (if applicable).  The buyer should be prepared to provide 10% of this for down payment and hopefully have an additional amount left over.  The SBA does allow for the seller to carry 5% of the required 10% down payment, however the seller’s note would need to be on complete standby- no interest may accrue and no payments are due until the SBA loan is paid off.  Many lenders require a seller carry note, however some of the more experienced and specialized lenders will not require this.  Often times a seller carry note will actually hurt the buyer’s cash flow because it has more unfavorable terms than the lenders note.