Hi Reader

Want to buy your next business with the bank's money?

Then you're going to want to read on.

In this issues of Freedom Through Acquisition, I’m going to share the inside scoop on exactly how to use an SBA 7a loan to buy a cash-flowing business.

The SBA 7a loan program is the US federal government’s way to make business acquisition possible for almost everyone.

It’s like Fannie Mae or Freddie Mac, except for business acquisition instead of mortgages.

I’ve personally handled dozens of SBA deals and can tell you that if you’re looking for freedom through acquisition, a 7a loan is definitely your path of least resistance and highest success.

Unfortunately, most people don’t understand how 7a loans work. Even worse, there are a ton of myths and half-truths about 7a loans specifically, and the SBA generally.

The result? Many good, hard-working people who are stuck in a miserable 9-5 and who dream about about buying a business ****never execute on their dream.****

People are intimidated by SBA loans

and that’s the number one reason why more of them don’t utilize them to fund their dream business acquisition.

Other common objections I hear all the time about SBA loans

• The process takes too long
• They fail all the time
• They’re too expensive
• They are too difficult to work with

This may sound intimidating but it shouldn’t be.

With the right planning, understanding, and advisors, none of these concerns should slow you down or prevent you from using an SBA loan to fund your dream business acquisition.

Since I’m not an SBA loan expert, I enlisted my friend Matthias Smith from Pioneer Capital Advisory (the most knowledgeable SBA broker I know) to answer some common questions about the SBA 7a loan program.

This will be a bit longer of a read than most issues, but it is packed with massive value and I know you will get lots of value out of all the insider info from Matthias.

Here we go.

Everything you’ve ever wanted to know about SBA loans in Q&A fashion:

Q: Why should I consider SBA loans for buying a business? What makes them special?

A: SBA loans are an excellent option, especially for first-time business buyers. The SBA 7(a) loan program, specifically designed for business acquisitions, offers several advantages. It has borrower-friendly terms such as low down payment requirements, extended loan terms, and flexible amortization schedules. These features make it easier for aspiring entrepreneurs to purchase a business.

Q: What does “cashflow based” mean in the context of SBA loans?

A: When we say that SBA loans are cashflow based, it means that lenders primarily evaluate the business’s cash flow to determine loan eligibility. As a general rule, if your business generates at least 15% cash flow above the loan payments to the bank and seller, and you can present a solid business plan that connects your experience to the business you want to buy, you have a good chance of securing financing. Lenders consider these factors when deciding whether to finance your acquisition.

Q: Who qualifies for an SBA loan?

A: To qualify for an SBA loan, certain eligibility criteria must be met. Here are the key factors:

1. The majority of the buyer ownership group (at least 51%) must be U.S. citizens or green card holders.
2. Individuals owning 20% or more equity in the business must meet specific criteria, including having a clean criminal record, no delinquent government debts, no outstanding child support obligations, and not being involved in open litigation. Additionally, they must be willing to personally guarantee the SBA loan.
3. The business being purchased must meet the SBA’s size standards, which vary by industry. You can refer to the SBA’s website for the specific size standards based on industry.

Q: What are the basic details of SBA loans in terms of loan amount, use, interest rate, and term?

A: Here are some key details regarding SBA loans:

• Maximum loan amount: $5 million.
• Use of loan funds: SBA loans can be used for various purposes such as expansion/renovation, new construction, equipment and fixture purchases, working capital, debt refinancing, seasonal lines of credit, inventory, and starting a business. Pioneer Capital Advisory specializes in acquisition loans.
• Interest rate: SBA loans typically have an interest rate of Prime + a spread. The Prime rate is currently at 8.25%. The specific spread depends on factors such as equity contribution, debt service coverage, industry, buyer’s experience, collateral, and down payment.
• Loan term: The term of the loan depends on whether real estate is included in the purchase. For business purchases without real estate, the term is up to 10 years. If real estate is involved, the term ranges from 10 to 25 years. Alternatively, business and real estate purchases can be split into two separate loans.

Q: When should I apply for an SBA loan when buying a business?

A: It’s best to start the loan application process once you have a signed letter of intent (LOI). While you can engage with a lender or loan broker before obtaining the LOI for preliminary discussions, the formal underwriting process cannot begin until the LOI is in place.

Q: What should I do to prepare for an SBA loan application if I have 6-12 months before my deal?

A: If you have sufficient time before your deal, here are some steps you can take to prepare for an SBA loan application:

• Clean up your credit report, especially if your credit score is below 700. A solid credit history is vital for a successful loan application.
• If your spouse won’t be part of the ownership group and you don’t live in a community property state, consider transferring the residence’s deed to your spouse’s name at least 6 months before the loan application. This can help exclude your house from collateral.
• If you own a house with equity equal to or greater than 25% of its fair market value, consider applying for a home equity line of credit. It doesn’t need to be utilized before applying for the SBA loan, but the total available credit plus the mortgage balance must exceed 75% of the home’s value to avoid pledging it as collateral.

Q: Why should I work with an SBA loan broker?

A: Working with an SBA loan broker like Pioneer Capital Advisory LLC offers several benefits. We assist you in identifying the best lender for your specific deal based on factors such as industry, geography, your background, debt service coverage ratios, and down payment funds. Additionally, we help prepare an initial closing checklist aligned with the type of deal and collateral involved. Our parallel track process ensures that post-approval items are already being obtained while the underwriting is in progress, leading to a faster closing. Read what our former clients have to say about working with us on their deals.

Q: What does the application process for an SBA loan look like?

A: The application process primarily involves gathering the necessary documents for underwriting. These documents may include a business plan, three-year projections, seller financial statements, financials for related entities, personal financial statements for buyers with 20% or more equity, and resumes/CVs for key buyers. Once the documents are obtained and submitted to Pioneer Capital Advisory or directly to the lender (if you choose the DIY approach), you can obtain one or more term sheets to assess your options based on the specifics of the deal.

Q: How long does it take to get an SBA loan?

A: Generally, it takes about 8 to 10 weeks from the start of underwriting with the bank to complete the loan process. This timeline begins once all the underwriting documents have been submitted. If your deal includes a commercial building, which requires appraisals, environmental reports, title work, and an ALTA survey, the process may take longer. Additionally, the involvement of slow parties, such as the seller or attorneys, can further delay the process.

Q: Should I work with a top 20 national lender or a local lender?

A: While nationally ranked SBA lenders within the top 30 are generally preferred, there can be exceptions. Some local banks may offer more aggressive terms for deals in specific geographies or industries. It’s essential to evaluate your specific deal and requirements to determine the best lender to work with.

Please note that the information provided is based on the time of this newsletter and may be subject to change. It is always advisable to consult with a loan broker or lender directly for the most up-to-date information and guidance on SBA loans.

Any more questions about SBA loans?

Hit me up on Twitter @lawyer4smbs and I will try to get you answers.

Until then, here's to great prospects and smooth deals!

Eric Hsu, M&A Lawyer

Editor, Freedom Through Acquisition Newsletter

PS, if you'd like to reach out to Matthias for your deal(s), please contact him at his website:

​https://www.pioneercapitaladvisory.com/​

Or schedule a call with him.