SBA Loans For Business Purchases – 8 Facts You Need To Know

Getting an SBA loan or other financing to buy a business, can be one of the most important aspects in the buying process. Not too many buyers have all cash for a purchase, and not many business owners are willing to take back a sizeable note.

Lenders look at many different things in both the business buyer (borrower) and at the business that is being purchased. Below are some key factors that make a difference whether you will receive SBA financing to buy a business.

  1. Buyers need to have a credit score of over 650 - the higher the better. Early in the lending process, the lender will be running a credit check to see if you qualify and if the debt service can be serviced by the cash flow.
  2. Lenders like a borrower who has experience in the business they are buying or in a related industry, or with specific job skills relating to the business they are buying. Lenders also like management experience or buyers who have previously owned a business (self-employment) and know what it takes to grow and keep a business on track.
  3. History of earnings (revenues). If there have been any downward trends in earnings over the previous three years, there should be a very good explanation or the deal will probably not be approved for financing.
  4. Positive cash flow must cover the debt service of the loan and provide you with an adequate income to live. 
  5. Does the buyer have equity in any real estate that can be attached to the loan? Although not imperative, this can strengthen the deal if the other parts of your loan application are weak such as the down payment, work experience or a lower credit score.
  6. Does the business that's being sold have management in place or key employees who are going to stay? Try to get commitments from existing key personnel and management to stay for a period - this shows the lender continuity and less risk after you take over.
  7. Will the seller take back a note? If the owner is willing to take back a note (even a small one for 10%-20%) this shows the lender that the owner is confident in the deal and is willing to take a chance on the buyer. Many times the note will be on a stand-by basis meaning the owner will get limited payments for a certain time period. This insures that there is sufficient cash flow to cover the debt service.
  8. Deal structure is critical. You need to structure the deal and price it right, before submitting your package. The loan process takes anywhere from 30 to 60+ days it really depends on you.

* Lazarus Financial Group can assist buyers in obtaining the appropriate business financing