Business Purchase Loan for Buying an Established Business
Business acquisition funding options can be complicated and confusing. Financing a business purchase with an SBA loan can be a very straightforward process and it can be an exceptionally good value, especially if you are buying an established business.
Perhaps the biggest benefit that some SBA lenders provide is 100% business acquisition funding up to at least $5 million for the current owners of established businesses IF they are purchasing another business like their own.
If, however, you do not own a business currently and you are buying an established business, you still have some flexible financing options.
Business Purchase Loan – Equity Requirements
No down payment business purchase loans are available in the following situations if and only if:
- you are buying an established business just like one you have successfully owned and operated for a long enough period of time to get a lender comfortable that you are a good risk, or…
- you have owned an established business or franchise for long enough to be “successful” and you are looking to expand by opening a new location.
5% down payment business purchase loans are available if and only if:
- the seller of an established business is willing to hold a second mortgage on “full standby” and you put down 5% in cash. Full standby means you are not supposed to make payments to the seller on the 2nd mortgage for as long as you have the SBA business purchase loan.
You do not have to already own a similar type of established business in this scenario, but a lender will want to see that you and/or your management team have the right qualifications and relevant experience.
10% down payment business purchase loans are readily available for qualified buyers acquiring all types of SBA-eligible small businesses.
Acceptable Sources of Equity Injection for an SBA Business Purchase Loan
The SBA is flexible regarding the source of down payment for business purchase loans for an established business. The following are acceptable:
- Cash you have saved
- Seller-held second on full standby for half of the required down payment
- Money you borrow from another lender – but you must show that you have another source of income for repayment on the borrowed money. (This can be income from a spouse).
- Investors – usually friends of family who provide cash in exchange for a small percentage of ownership in the business
- Retirement account rollovers – this can be a little complicated, but it is very popular as it can be done tax and penalty free in many situations
- Current Employer Retirement Account loans – the same guideline re: having income from another source or spouse would apply here, but in this case, the income could obviously come from the employer where you have the retirement account. This is frequently used by borrowers who are purchasing a business but not leaving their current job. Typically, an SBA lender will only be comfortable with this scenario for “low maintenance” businesses like self storage, RV or boat storage, car washes, laundromats, certain online businesses, etc. where there less time needs to be devoted to the business or where you have capable management or an acceptable third party management company in place. It is a judgement call for a lender, but if they feel like you can effectively operate your business while keeping your current job, it can work.
- Non-Cash Assets – the SBA allows the use of non-cash assets, but it is rarely allowed by lenders for borrowers seeking a business purchase loan since it can create complications that do not exist when a borrower is putting cash down. The SBA cautions lenders to carefully evaluate the value of property or assets that a borrower would use instead of cash and they must order an appraisal or other valuation by an independent third party that shows the value of the asset(s) is greater than the Net Book Value.
The crucial fact with all of the above is that the SBA lender must feel comfortable that you have enough of your own cash or assets invested or at risk. However, some lenders are okay if all of down payment is coming in the form of a gift or “investors” who are all family.
Bottom line, it is very case by case and dependent on how much risk they see with the loan request.
$5 Million Business Acquisition Funding
The 7a program allows lenders to provide up to $5 million in financing for a business purchase. Lenders can also use the program to finance real estate, equipment, working capital or any other needs of a business if they can get comfortable with the loan request.
The truly unique benefits of this type of loan is that for the right transaction, the loan can be approved without collateral. In other words, if you have the right level of experience and you are buying a solid business with stable cash flow, there are lenders who will lend $5 million on a transaction that does NOT include real estate or other hard assets. i.e. the entire purchase price can be allocated to business value or goodwill.
$5 to $10 Million Business Acquisition Funding
A few SBA lenders will also allows much larger transactions by providing a second mortgage behind a $5 million 7a first mortgage. This is only for the strongest of transactions, but it happens more than most borrowers (and lenders) realize.
For further clarification, the following types of business purchases are eligible for a small business acquisition loan with no down payment:
- An independent business acquiring a competitor or “complimentary” business of similar type
- An independent business growing by adding a new location
- A successful franchisee buying a competitor
- A successful franchisee expanding by adding an additional location
- A successful medical practice, dental practice, veterinary practice and numerous other medically-related practices and businesses acquiring another practice (or complimentary practice/business) or adding a location
All of the above can be financed with no down payment via with some lenders.
Business Purchase Loan With Real Estate
For business purchase loans that involve real estate, loans are available whether you are own or lease the real estate.
The 100% business acquisition loan program is offered with terms up to 10 years. It is only offered by a few SBA lenders and the transaction has to make good sense to be approved, and these lenders will also allow you to purchase real estate as part of the loan as well.
If you are buying a business that includes real estate then terms of up to 25 years are possible. The real estate must be more than half of the total purchase price and your business or practice must occupy at least 51% of the space. Click here for more in-depth guidelines for that type of transaction.
FYI: Almost any type of SBA-eligible business could possibly qualify for this program and your business does NOT have to be a franchise or medically-related.
Online Business Acquisition
In fact, SBA loans can be used to purchase an e-commerce business with no down payment, again, if you already own a successful online business.
For a good rundown on what is possible for online businesses, you can visit this post on our blog: SBA e-commerce financing.
Successful franchises are evaluated differently than independent businesses as lenders are more likely to allow the use of projections to decide if they qualify.
Loans for franchises are only available if the franchise has been approved by the SBA. Loans for newer franchises with fewer locations may not be available from all lenders, but if the transaction is solid and the franchise is approved prior to closing, then you should be okay.
Existing independent businesses with one or more locations seeking a 100% business purchase loan for opening a new location – not purchasing someone else’s established business – are also possible and it is helpful (but not necessarily necessary) if the current business/location is profitable enough to cashflow most of the loan for the new location.
Examples of eligible franchises that are eligible for 100% financing as part of a business expansion include, but are not limited to:
- Golden Corral
- Jimmy Johns
- Church’s Chicken
- Goddard Schools
- Kiddie Academy
Auto Repair and Care:
- Grease Monkey
- Big O Tire
- Jiffy Lube
- Camp Bow Wow
Business Purchase Financing Terms
The rates and terms available for these loans depend on the strengths of each transaction. The stronger the borrower/business, the better the terms.
Please note: The SBA lenders that offer financing with no down payment typically will NOT entertain loans smaller than $350,000 and some have a minimum of $500,000.
Both fixed rates and floating rates are available when buying an established business. Best case scenario is a 10 year fixed for larger loans and very qualified borrowers. Most SBA lenders, in fact, will not offer a fully fixed 10 year loan, but there are a few and they generally prefer to lend to medical practices.
Next best is a 5 year fixed with a 10 year loan term where the rate adjusts once every 5 years. Worst case, is a floating rate that would adjust either yearly or quarterly with the Prime Rate.
The margin over the Prime Rate can be anywhere from Prime +0% to Prime + 3% depending on the lender, the overall quality of the borrower and the transaction, and economic conditions at the time.
SBA Minimum Borrower Qualifications
Since these are SBA loans, at a minimum they require:
- Personal Guarantee from all owners/guarantors at or above 20% ownership
- Good credit and credit scores for all owners/guarantors
- No recent “character” issues for any guarantors
- Strong, stable cash flow for established businesses or a solid business plan and projections if a new location for an established franchise or a medical practice
- Possibly additional collateral for a business purchase with no real estate or hard assets. Ask us about this as there are situations where this is NOT required and at least 2 ways to avoid having a lien against your home equity should you own a home.
- Terms of 10 years or less will have no prepayment penalty
- Loans for more than 15 years have a very reasonable and short prepayment penalty
- Debt service coverage could be flexible depending on the type of business or practice
- Most closing costs as well as the SBA loan fee are financeable
Also, FYI, small business acquisition loans for businesses in leased space are typically limited to 10 years. It is possible that if the loan is being used to finance a significant amount of “long-life” equipment that this could be extended.
Please contact us at 1-800-414-5285 if you require more info re: a business purchase loan.