Buying a Business with an SBA Loan – What to Think About First

An SBA Loan will fund the purchase of a business.  When you go to your local bank, the bank will steer you to an SBA Loan

• Experience: the Borrower will need a minimum of one year of management or ownership experience in the particular industry.
  
  a) The exception to this is transferable skills. However, your management experience in an IT Department does qualify you to run a restaurant.

• Credit: The SBA Regulations speak to ‘credit worthiness’. In essence, the SBA Regulations focus on credit issues, not credit scores. However, the SBA allows banks/lenders to add layers of protection, underwriting overlays, as the bank/lender decides to increase its risk protection. So if you go to a bank/lender for and you are told that the minimum middle of three credit score is 680, that is the credit criteria for that bank/lender, not all and not the industry standard. (warning: this credit score explanation is for loans over $350,000 dollars)

• Down Payment: The down payment in the SBA Industry is called the ‘cash injection’. Not quite the same thing though. Down Payment connotes the percentage of cash a bank/lender wants you to contribute based on the purchase price. The Cash Injection is based on several other additional factors including the SBA guarantee fee, closing costs and other costs of the loan.
  
  a) The industry standard for ‘cash injection’ to purchase a business is 10% of the total ‘project’ cost. This may include the additional purchase of equipment, inventory, working capital or other parts of the business future ownership.
  
  b) The SBA Regulations state that of this 10%, the Borrower must contribute 5% in cash and the Seller may ‘finance’ the other 5% in a Loan Note – which cannot be paid back during the life of the SBA Loan. No payments during the life of the SBA Loan and cannot be paid off during the life of the SBA Loan.
  
  c) The cash used by the Borrower for the ‘cash injection’ must be sourced and seasoned for a minimum of two months (some bank/lenders require three months). This means the cash must be shown in a bank account for two months prior to the purchase contract deposit and two months prior to the closing date.
  
  d) The cash may come from a gift which can fund the ‘cash injection’ 100%. But the Giftor may have to provide the bank statements to show the ‘source and seasoning’. (although the 100% is allowed by SBA Regulations – bank/lenders really want to see some of the cash come directly from the Borrower)

• Citizenship/Green Card: Under current SBA Regulations, all future owners of any percentage must be citizens or have a Green Card. Any other Visa Designation or No Visa is not allowed

• The above covers the main factors for a Borrower. The other 50% of underwriting criteria is based on documentation from the Seller.

• Note: the above are Main Factors to understand when looking to purchase a business. There are many other nuances to the SBA Regulations which may affect the future qualifications and transaction completion which change with the Borrower and Particular Transaction