In today’s market, small businesses can be an attractive purchase target. For those looking to own a company, buying an established and profitable business can offer plenty of upside. And, with 10,000 Baby Boomers retiring every day, there’s an expanding number of businesses available (Hall, 2022).
On top of that, data suggests buying an established business may increase your odds of success. While the average startup fails 90% of the time, fully-funded small business purchases default at a fraction of that rate–3.5% as of 2022,according to Entrepreneur magazine (Smith, 2022).
With these factors working in your favor, you may be eyeing an upcoming purchase. And you don’t have to go it alone. The Small Business Administration (SBA) offers simple ways to capitalize your business purchase.
In this buyer’s guide, let’s take a look at the SBA 7(a) loan. What it is and how it can help you realize your dream of business ownership.
What is an SBA 7(a) loan?
The SBA 7(a) loan is a designated financing program for small businesses (7(a) Loans n.d.). As the SBA flagship option, the 7(a) loan covers several scenarios, including working capital, refinancing, fixed-asset financing and business purchases.
Importantly, the SBA 7(a) loan can also be used for acquisition.
By meeting the SBA requirements, buyers can access up to $5 million in financing toward the purchase of a small business. This financing, at competitive interest rates, can also be combined with other financing options, such as subordinated seller debt, toward the purchase of a larger business.
The end result is more access to capital for the buyer, enabling them to structure the purchase in an advantageous way and bring enticing cash to close for the seller.
What are the benefits of an SBA 7(a) loan?
In addition to financing, there are several other benefits to the SBA 7(a) loan.
First, the down payment (or “equity injection”) requirements are reasonable. For most SBA 7(a) loans, the buyer will need to bring 10% to the table, financing the remaining 90%. And, for partner buyouts, the down payment requirements may be less (Types of 7(a) Loans, n.d.).
However, the buyer can get creative with how they supply their down payment. Consider this quote from the SBA SOP 50 10 6 (p. 251):
“At a minimum, SBA considers an equity injection of at least 10 percent of the total project costs (all costs required to complete the change of ownership) to be necessary for such transactions. Seller debt may not be considered as part of the equity injection unless it is on full standby for the life of the SBA loan and it does not exceed half of the required equity injection.” (SOP 50 10 6 Lender and Development Company Loan Programs, 2020)
Second, the SBA 7(a) loan process requires a business valuation conducted by a “qualified source.” The valuation establishes an objective and mutually agreeable sales price, helping buyers avoid lengthy negotiation and over-payment. This is just as important for friendly transactions (those made between family members) as it is for unrelated parties.
Finally, SBA 7(a) provisions allow for the seller to remain a consultant for up to 12 months. When combined with financial incentives (such as a balloon payment on subordinated seller debt), this contracted relationship can keep the seller motivated, and help the buyer navigate transition into owning the business. By working with the seller directly, the new owner can ensure smooth operations and transfer of business knowledge and relationships.
What are some common SBA 7(a) misconceptions?
A common misconception with SBA 7(a) loans is that they are outside the traditional credit underwriting process. This is, in fact, not the case.
Another common misconception is related to underwriting requirements. These too follow the same guidelines (namely, the 5 C’s of Credit) as other lending products. You can expect the bank to conduct an underwriting review of all documentation.
Lenders such as Comerica, approved by the SBA’s Preferred Lender Program (PLP), provide service directly to companies in partnership with the Small Business Administration. This means you work with the bank the same way you would for any other lending product.
How should I start looking at the SBA 7(a) loan?
Applying for an SBA 7(a) loan is straightforward.
A helpful first step is to review the SBA requirements and loan products. You can find information on the full SBA 7(a) loan, or Express option, by visiting the SBA 7(a) loans site (7(a) Loansn.d.-b). This page also provides helpful information on funding limits, equity injection and turnaround times.
Next, it’s helpful to take a look at required documents. These documents will be reviewed by the bank to ensure the applicant meets program guidelines. Visit the Comerica Business Finance site for details on applying for an SBA loan, along with resources and helpful links (How to Apply for an SBA Business Loan,n.d.).
Lastly, it will be helpful to consult a business banker. Comerica’s experienced bankers can help you talk through financing structures, application requirements, documentation and more. Working with an expert banker can simplify the process and ensure you get the best loan for your purchase needs.
Interested in learning more about your SBA 7(a) options? At Comerica, our Business Banking team is committed to helping you explore financing and purchase the right business for you.
Contact a Comerica SBA loan officer today, or visit Comerica.com for more information (Small Business Administration (SBA) Loan Guide, n.d.).
NOTE: IMPORTANT INFORMATION
February 2023This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein have been obtained from sources we consider to be reliable, but Comerica does not warrant, or guarantee, its completeness or accuracy. Materials prepared by Comerica personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica, including investment banking personnel. The views expressed are those of the author at the time of writing and are subject to change without notice. We do not assume any liability for losses that may result from the reliance by any person upon any such information or opinions. This material has been distributed for general educational/informational purposes only and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product, or as personalized investment advice. Comerica‘s SBA lending group consists of various divisions and affiliates of Comerica Bank, including Comerica Bank & Trust, N.A. and Comerica Insurance Services, Inc. and its affiliated insurance agencies. Comerica Bank and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors regarding your specific situation.