If you’re looking to acquire another business in order to grow yours, it may be worth it to consider using an SBA loan. Using an SBA loan to buy a business can give you affordable interest rates and reasonable repayment terms. 

Before you get started, it’s important to prepare yourself for the process, take the time to make sure you’re eligible and confirm that it’s a good fit for your needs. Here’s what you need to know.

What Is an SBA Loan?

An SBA loan is a small business loan that’s partially guaranteed by the Small Business Administration. The SBA doesn’t lend the money. Rather, it works with approved lenders to provide the actual financing.

Among other forms of small business financing, SBA loans are generally more difficult to get. But if you qualify, they also offer some of the most affordable rates and solid repayment terms so you don’t have to worry about a short-term payoff or a balloon payment.

With an SBA 7(a) loan, for instance, you can borrow up to $5 million, which may be more than enough to complete your acquisition. 

Repayment terms can go as long as 10 years. The SBA guarantees up to 85% of the loan if it’s $150,000 or less and up to 75% if it’s above that threshold. 

This guarantee makes it possible for SBA lenders to offer favorable terms to eligible businesses. Because if your company defaults on the debt, the government agency provides the lender with the guarantee amount, thereby reducing their risk.

SBA loans aren’t easy to get approved for, but if you’re eligible, it can be one of the best ways to get the funding you need to buy a business.

Application Process for an SBA Loan

Applying for an SBA loan to buy a business is a relatively straightforward process, but there are some steps you’ll want to take before you actually start submitting an application. Here are the four steps you’ll want to take to make the process go more smoothly.

Check if Your Business Is Eligible

Most small businesses are eligible based on the basic criteria set by the Small Business Administration, which says your business must:

• Operate for profit
• Be engaged in, or propose to do business in, the U.S. or one of its territories
• Meet size standards
• Have reasonable owner equity to invest
• Use alternative financial resources, including personal assets, before seeking financial assistance

That said, individual lenders have their own eligibility requirements on top of the basic criteria. 

For example, while the SBA sets a minimum FICO Small Business Scoring Service (SBSS) score at 155, some lenders may require a 160 or 165 — this score is essentially the business version of your personal FICO score.

In addition to your business credit scores and personal credit scores, lenders will also consider whether you have a down payment (10% minimum is common) and collateral, how long you’ve been in business, what your revenues and expenses look like, and more. 

If you believe you qualify, move on to the next step. If you’re unsure, consider reaching out to an SBA lender to gather more information.

Collect the Required Documents

SBA loan applications require a lot of documentation, and the faster you can submit everything, the sooner you’ll get a decision. Instead of waiting until after you start the application process, put together your required documents now.

While some lenders may have specific document requirements, here are the basic ones the SBA requires from your business:

• SBA Loan application (SBA Form 1919)
• Personal background and financial statement (SBA Form 912 and SBA Form 413)
• Business financial statements, including current and previous profit and loss statements and a one-year projection
• A list of ownership and affiliations 
• The original business license or certificate of doing business
• Your application history for other business loans
• Personal and business income tax returns for the last three years
• Personal resumes for each principal
• A brief business history and overview of the needs of your business and how an SBA loan will help
• Copy of your business lease or a note from your landlord giving terms of a proposed lease

Here’s what you’ll also need from the business you’re planning to acquire:

• A current balance sheet with a profit and loss statement
• Three years of tax returns
• Proposed bill of sale with the terms of sale
• Asking price with a schedule of inventory, furniture and fixtures, and machinery and equipment

Compare Lenders and Apply

You can only get an SBA loan to buy a business from an approved SBA lender. You may start the process by checking with your bank or credit union to see if it offers SBA loans. 

But even if it does, it’s still a good idea to shop around and compare offers from other lenders to ensure you get the best deal.

Start by using the SBA’s Lender Match tool. There are more than 800 lenders, both local and national, that participate in the Lender Match program. With this tool, you’ll provide some details about your business and its needs.

Within two days you’ll then get an email with a list of lenders and their contact information that are interested in working with you.

Once you have this list, visit each lender’s website to get an idea of what they offer. In cases where information is sparse, consider calling the lender to get more details. 

You’ll want to look at interest rates, repayment terms, fees, customer satisfaction ratings, and other factors to help you determine which lender is the best fit for you.

Once you’ve narrowed down your list to one lender, take the next step and start the application process. 

Wait for the Result

It can generally take between 60 and 90 days to get approved and receive funding for your SBA loan. This process can take time because it involves both the lender and the Small Business Administration. 

It starts with the lender, which does an initial underwriting process to determine your eligibility. This typically takes up to 14 days. 

The letter will outline the loan amount, along with the terms. If you accept, the lender will work with the SBA to complete a more formal underwriting process, which can take several weeks. 

If that process is a success, you’ll receive a commitment letter from the lender with the final terms of the loan. If you accept those, you’ll sign all of the closing documents, pay any applicable fees, and receive your funds.

FAQs

What Disqualifies You from Getting an SBA Loan?

While most businesses meet the minimum qualifications set by the SBA, there are some businesses that are prohibited from using the SBA loan program. That includes: 

• Real estate investment firms
• Firms involved with certain speculative activities
• Dealers of rare coins and stamps
• Firms involved in lending activities
• Pyramid sales plans
• Firms involved in illegal activities
• Any business whose principal activity is gambling
• Charitable, religious, or other nonprofit organizations

Other things that may disqualify you include having a low credit score, having too much outstanding debt, not having collateral or a large enough down payment, not having enough operating history, and having a less-than-stellar financial record. 

If you’re denied an SBA loan, ask the lender for the reasons so you can know what to work on. If it’s because of your business credit history, take some time to build business credit before you reapply.

Can You Use the SBA Loan to Start a Business?

SBA loans are designed for existing businesses, which means you likely won’t get approved if you apply without one. 

Even for new businesses, it can be challenging, even with the SBA microloan program, which is designed to help startups. This is because many SBA lenders still have strict requirements to get approved.

If you have an existing business and want to start a new one within your current business structure, it may be possible to use an SBA loan to start your new business. However, it’s always a good idea to consult with a loan officer to get more information about your options.

How Do I Buy a Business With No Money?

If you have plans to acquire a business, but don’t have the cash on hand to complete the purchase, using a small business loan, such as an SBA loan, can help. If you don’t qualify for an SBA loan, however, you may be able to get a bank loan or even an online loan.

Keep in mind that online business loans typically have shorter repayment terms, so they’re not conducive for large expenses like a business acquisition. Also, try to avoid lines of credit because they’re better designed for working capital needs.

The Bottom Line

Using an SBA loan to buy a business can be a great way to complete your acquisition because of its favorable financing terms. However, it’s important to first understand how the process works and how long it takes to complete. 

As you walk through each of these steps, take your time to ensure that you meet all of the requirements. And if you get denied, consider other financing options that may have less stringent requirements.

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