SBA Loans: A Big Help to Small-Business Buyers

By Heather Endresen

Union Bank, N.A.            

Senior Vice President, SBA and Government Lending

 June 2012

If you’re considering buying a small business, you’re in good company. The Wall Street Journal has predicted a $10 trillion wealth transfer by 2020 through the sale of small businesses, as retiring baby boomer business owners head for the exits.

Fortunately for buyers, the Small Business Administration (SBA) is offering more loan funds for small business acquisition. Borrowers may request up to $5 million in SBA financing to buy a business, up from $2 million a couple of years ago. The favorable terms being offered are making this a preferred financing vehicle.

Here are some important tips to bear in mind if you choose to pursue an SBA loan:

• Find a seasoned lender

Many private lenders have experience with the SBA, but it’s best to work with one that offers a strong track record with business acquisition financing. That will allow buyers to better navigate the process with a solid understanding of the nuances of this financing niche.

In fact, it’s a good idea to find a lender even before identifying a business to buy. This can help you determine your budget, and later, prepare a loan application package.

• Determine the value of the target business

Before buying a business, you must determine its value. An experienced business valuation consultant is critical to this process, especially one who is independent and certified by a professional organization, such as the American Society of Appraisers. Also, make sure the business appraiser has strong experience with the target company’s industry as well as with SBA loan applications.

• Prepare the down payment and identify collateral

SBA loans for business acquisitions generally require a 25 percent down payment. The down payment can be a combination of buyer funds and financing from the seller of the company itself.  Sellers often agree to such an arrangement to structure an appropriate purchase.  SBA financing also requires other collateral, such as current business assets or equity in the personal real estate of the buyer(s), if available.

However, even without sufficient collateral, a loan may still go forward. The SBA guaranty is intended to help mitigate a shortfall in collateral if all other factors are positive, such as the overall financial strength of the business and the qualifications of the buyer.

• Organize your records

Along with the loan application, the bank and the SBA will require documents that demonstrate the financial health of the buyer. These include personal tax returns for the previous three years, a personal financial statement, work history, experience in the industry, and potential repayment sources.

You can expect lenders to carefully review the financial health of the target company as well.

• Update your résumé 

When it comes to financing, work experience counts – polish your résumé before applying for an SBA loan. If you have experience in your target company’s industry, make sure it’s prominently showcased. But don’t despair if you lack direct industry experience: other relevant skill sets, such as a strong management track record or business finance expertise, can also help tip the loan decision in your favor.

Taking the time to write out a detailed transition plan that explains how you will approach the operation of the business is a smart idea as well.  It is also beneficial to include any new plans to re-energize, modernize or expand the business.

• Establish a strong banking relationship

After the sale of the business is completed and the initial SBA business acquisition loan is funded, your ongoing relationship with your banker is critical.  As the transition of ownership commences, there may be a need for a line of credit, cash management or equipment financing.  It’s important to select a bank and banker who understands the initial transaction financing and is prepared to continue to focus on your ongoing needs.

Small businesses are vital engines to our economy, and owning one can be challenging at times, but an exhilarating opportunity. The SBA offers considerable help to those interested in purchasing a small business. Working with an experienced business banker can help you take advantage of those opportunities, and help ensure a smooth and efficient transaction as well as a rewarding long-term banking partnership.

The foregoing article is intended to provide general information about budgeting and is not considered financial or tax advice from Union Bank.  Please consult your financial or tax advisor.

Heather Endresen is a senior vice president and head of SBA and government lending for the Business Banking group of Union Bank, N.A.  Union Bank, N.A., is a full-service commercial bank providing an array of financial services to individuals, small businesses, middle-market companies, and major corporations. The bank operates 407 branches in California, Washington, Oregon, Texas, New York and Illinois, as well as two international offices. UnionBanCal Corporation is a wholly-owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd., which is a subsidiary of Mitsubishi UFJ Financial Group, Inc. Union Bank is a proud member of the Mitsubishi UFJ Financial Group (MUFG, NYSE:MTU), one of the world’s largest financial organizations. Visit www.unionbank.com for more information.