SBA loans can be a good option for buyers of businesses which do not have enough assets for collateral to pledge against the entire loan amount. Banks often turn to SBA loans in situations where this gap, or “blue sky” exists to reduce their risk. The challenge to pursuing a SBA loan is that there are many requirements and restrictions with regards to qualifying for a SBA loan; moreover, the fees associated with SBA loans are typically larger than those associated convention loans.
Because SBA loans have to conform to many regulatory requirements, there is a typical structure seen for many SBA transactions, which is as follows:
- 25% Equity (generally split between a Seller Note and Buyer Cash at Closing)
- 75% SBA 7(a) Loan
The current interest rates on floating rate SBA 7(a) loans are generally around around Prime + 2.5% (6.25% total, using today’s Prime Rate). Some banks will lend on a fixed rate basis for SBA loans and others insist on a floating rate.
Finally, banks want to mitigate as much risk as possible when lending, even under the SBA program. So buyers will have to sign personal guarantees, have relevant experience relating to the business they are seeking to acquire, and generally must have good credit.
SBA loans are not for everyone (or every bank for that matter), but they are a great tool for buyers seeking to make an acquisition.