Getting SBA loan or other financing to buy a business, franchise,
or professional
practice can be one of the most important aspects in the process of buying a
business. 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, franchise, or professional practice that is being
purchased. Below are some key factors that make a difference whether you
will receive SBA loan financing to buy a business.
1. Buyers need to have a credit score of over 600 - the higher the better.
Personal or business bankruptcies or many late payments will usually nullify
the chances (unless the BK has been discharged) of a borrower no matter how
good the other borrower criteria appears. Get any "dings" in your credit
history removed or fixed well before the buying process. 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. You will need to provide a
resume or description of your work experience. Have one ready that focuses
on your industry strengths and management experience.
3. History of earnings (revenues) both total annual revenues and adjusted
net income should have a either be flat or growing over the previous three
years (no one wants to finance a business on a downward trend). 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 (or adjusted net income) must cover the debt service
of the loan and provide you
with an adequate income to live off on, otherwise you won't get the loan.
Lenders look closely at the tax returns of the business being sold - so if
the seller is playing any games (not showing income, excess deductions, etc.
on his business tax returns) chances are you won't get a loan. Ask for the
business tax returns early in the process of looking at a business and see
if you can "add back" sufficient net income, depreciation, interest, and
owners salary (adjusted net income) to pay back the loan. Also, cash flow
analysis by lenders is very different than by business brokers, agents, or
business owners.
5. Does the buyer have equity in any real estate that can be attached to the
loan? Although not imperative with many of the lenders we represent, 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. Also
many times the note taken back by the owner 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 (note).
8. Deal structure is critical in business and franchise purchases
. You need to
structure the deal (and price it right) before submitting your package. Only
30% of all submitted SBA loans submitted direct to lenders for business
purchase financing are funded. Our success rate is well over 90% because of
the way we assist in and structure deals for our clients before submission
and because of our long working relationships with many of the more
professional and aggressive SBA loan and commercial financing lenders and
financial institutions.
Peter Siegel, MBA is a SBA loan financing consultant for business purchase
acquisition financing. He assists business buyers, business brokers, and
business owners nationwide to obtain SBA loans and commercial financing on
all types of small and mid-sized businesses priced between $400K and $5M.
Working with over 25 lending institutions and because of his over 20 years
industry experience, he offers his clients the lowest rates, best SBA loan
packages, and most deals are financed in 24 to 32 days! He can be reached
direct at 800-528-7718.
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