SBA Loans - 11 Steps Needed To Finance That Business Purchase!
Written by: Peter Siegel
Getting financing to buy a business can be one of the most
important aspects of buying a business. Not too many buyers have
all cash for a purchase and not many business owners are willing
to take back a sizeable note. Buyers need to be prepared well in
advance with the information below to increase the odds of
getting a loan to buy a business.
Lenders look at many different things in both the business buyer
(borrower) and at the business that is being purchased. Below
are some key factors that make a difference whether you will
receive SBA financing to buy a business:
1. Buyers need between 15% - 30% for a down payment depending if
there is real estate with the business or if just the business
is being sold by itself. The down payment can come from many
different sources: savings, equity built up in your home (home
equity line of credit or 2nd on your home), a gift (usually from
only family members), or retirement plan (401K, Pension, IRA
etc.). You CAN NOT borrow the money or utilize a credit card for
your down payment!
2. Buyers need to have good to excellent credit. Any
bankruptcies or many late payments will usually nullify the
chances of a borrower no matter how good the other criteria
looks. Get any "dings" in your credit history removed or fixed
well before the buying process. Early in the lending process,
the lender will be running a credit check to see if you qualify.
3. Lenders like a borrower who has experience in the business
they are buying or in a related industry, or with specific job
skills relating to the business they are buying. Lenders also
like management experience or buyers who have previously owned a
business and know what it takes to grow and keep a business on
track. You will need to provide a resume of your work
experience. Have one ready that focuses on your industry
strengths and management experience.
4. Buyers should write up a mini business plan on the business
they are thinking of buying. Lenders usually require this to
make sure you know about the business and industry you are
buying into and what you are going to do with the business once
you buy it. These plans can be a short outline (3-5 pages) where
the business has been, what is happening with it now, and what
you plan to do with the business once you buy it.
5. Positive cash flow (or adjusted net income) must cover the
debt service of the loan and provide you with an adequate income
to live off of, otherwise you won't get the loan. Lenders look
closely at the tax returns of the business being sold - so if
the seller is playing any games (not showing income, excess
deductions, etc. on his business tax returns) chances are you
won't get a loan. Ask for the business tax returns early in the
process of looking at a business and see if you can "add back"
sufficient net income, depreciation, interest, and owners salary
(adjusted net income) to pay back the loan.
6. Does the buyer have equity in any real estate that can be
attached to the loan? Although not imperative with some lenders,
this can strengthen the deal if the other parts of your loan
application are weak such as the down payment, work experience
or a lower credit score.
7. Does the business that's being sold have management in place
or key employees who are going to stay? Try to get commitments
from existing key personnel and management to stay for a period
- this shows the lender continuity and less risk after you take
8. Make sure there is adequate training after the sale of the
business. Lenders look for a training period to be anywhere from
2 months to 12 months from the seller (depending on the type of
business you are buying and your past work experience and how it
relates to the business you are purchasing). Make sure you
negotiate this point carefully in the purchase agreement.
9. Will the seller take back a note? If the owner is willing to
take back a note (even a small one for 10%-20%) this shows the
lender that the owner is confident in the deal and is willing to
take a chance on the buyer!
10. Lenders will also want to know if you have any other outside
sources of income i.e. other business income, income from a
spouse's employment, rental properties, investment income etc.
You will also need to provide 3 years of current personal tax
11. The loan process takes anywhere from 30 to 60+ days it
really depends on you. The quicker you get info, forms, and
questions answered to the lender the faster the process takes.
When the lender asks for certain data/info move on it quickly!
About The Author: Peter Siegel, MBA is the Founder & Principal
of BizBen.com - California Businesses For Sale and
USABizMart.com - USA Businesses For Sale, two of the most
popular business for sale related websites on the internet. He
is also the author of three books on the topic of business sales
and business buying. The most current book is "Businesses For
Sale - How To Buy Or Sell A Small Business". Mr. Siegel also wri
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