SBA OVERVIEW
LOAN BULLET POINTS
SBA 7a loans are most commonly referred by Business Brokers for Buyers acquisition of a business only
or a business with real estate.
SBA 504 is generally used for commercial real estate or sometimes in conjunction with a 7a when the
real estate is included and the business allocation is more than 50% of the total transaction.
7a has a 10‐year term on business, 25 on real estate. If more than 50% of the loan proceeds are going
towards real estate, then the term of the total loan is 25 years. If less than 50% of the loan proceeds are
going towards real estate, then the term is 10 years. SBA is no longer doing “blended” amortizations.
Interest rates are most commonly prime plus 2.75% or about 6%+/‐ right now. Sometimes for an extra
.25% or .50% of a point the interest rate can be fixed.
SBA loans Require good credit 650 or above, the higher the better. The loan requires a personal
guarantee. It is possible for one spouse to be on the loan and another not to be. Any partner with more
than 20% ownership in the business or entity owning the business must be a guarantor on the loan.
SBA loans underwriting requirements are based on cash flow and not collateralization of the loan
generally speaking. They are often referred to as “cash flow” loans. However, if a Buyer has a house with
25% or more equity the Lender will take it as collateral in most cases. A loan amount under $350,000
reverts to the Lenders in‐house policy as to whether or not they take a lien on the house with 25% or
more equity. Ken did a transaction where they did not.
Most SBA Lenders use a 1.25 debt service coverage ratio. This will be discussed in more detail. Basically
the Lender recognized cash flow must cover the debt service and Borrowers required salary on a 1:1
ratio and have a 25% cushion or margin for error.
Closing Costs are generally 3%‐4% of the loan total and include an SBA Guarantee fee. This fee is like
insurance. The Lender is insured for 75% of the principal balance of the loan by the SBA in case of
borrower default. The borrower/buyer pays this fee along with various associated bank fees and an
appraisal on the business. If real estate is included it requires an appraisal and environmental audit,
phase I to begin with.
Working capital and closing costs can be financed into the loan, the total loan with these items included
is referred to as total “project cost”. Sometimes a LOC is issued separately instead of working capital
which is fully funded at closing. The 20% down payment is 20% of the total project cost in most cases.
SBA loans generally require 20% down. 10% of this can be in the form of a subordinate Seller promissory
note that may have “standby” terms or fully amortize from day 1. SBA loans require that the business
and real estate if applicable are appraised.
BUYER BULLET POINTS
Good credit required
Related work experience required
Post‐closing liquidity evaluated
Personal guaranty required if more than 20% ownership
The buyer will have to buy a Life Insurance Policy and name the Lender as co‐insured prior to closing.
Buyer will need to complete a lengthy loan application that includes a personal financial statement, the
need to write a business plan and the requirement to supply a pro forma income/expense earnings
worksheet plus provide 3 years of Personal Tax Returns.
Buyer in most cases needs to have 20% down and decent post‐closing liquidity. Borrowed funds maybe
possible for the down payment if they are “seasoned” for 3 months in their bank account and the
the borrower must have the outside income to meet the credit obligation for those funds, or proof that the
funds were gifted.
A borrower’s house will need to be pledged as collateral in most cases if equity is 25% or more of the market
value of the house. A line of credit taken out against the house prior to loan application could reduce the
equity and should not hurt the loans approval chances theoretically.
The borrower’s total household debt and Spouse’s salary are evaluated to determine the Buyer’s
required salary from the business being acquired which is part of 1.25 debt service coverage ratio
formula. The formula is similar to residential loans. Monthly household debt is annualized and divided
by 40. This number represents how much money the husband and wife or single party if not married
must take as a salary from the business. In one example I reviewed the total debt owed by the borrower
was $426,622 which represented $3,949 in monthly payments or $47,388 in annual debt payments
divided by 40 = $118,470 required annual household salary’s. In the case of a single person household,
for example, take the $118,470 plus the annual debt service of the proposed loan and add 25% to the
total. The Lender recognized cash flow must be equal to or greater than this number. In a married
household with the Wife making $60k the Husband buying the business would require a $58,470 salary,
plus the annual debt service plus 25% to get to the 1.25 DSCR.
SELLER BULLET POINTS
The Seller gets either 90 or 100% cashed out on an SBA loan.
The Seller’s cash flow must be well documented on a minimum of two years of Tax Returns, three will be
requested and evaluated in most cases. Year to Date P&L Statements cannot be more than 60 days old
at the time of closing.
The Seller must be cooperative about supplying any requested information the Lender / Borrower may
need to complete the application and go through underwriting.
The Seller must be willing to take the business off the market at least 30 days for the Buyer to seek a
written loan commitment. From the time the loan commitment is received and accepted closing is
generally about another 30 days out.
If the Seller agrees or is required by the Lender to hold a 10% note it is subordinate to the SBA’s loan.
The Seller must sign a form 4506 T authorizing the Lender to obtain his Tax Returns directly from the
IRS. (So they need to match the ones he gave the Broker, Buyer & Lender)
GENERAL INFORMATION
Information on SBA loans can be found at www.sba.gov They have an e‐mail newsletter and webinars.
There is a lot of information on the site.
There is a document called the “SOP” that shows all of the rules and guidelines of SBA loans. This stands
for Standard Operating Procedures. Every so often changes are made to the SOP and the rules for the
loans change with it.
We generally use SBA “Preferred Lenders” who can underwrite and approve loans in‐house. Referred to
as PLP, preferred lender program.
SBA loans can be up to 100% with no money down if they are run through the SBA “General Processing”
and if the allocation to goodwill in the purchase price is less than $500k. This means the loan gets sent
to the SBA for approval instead of a PLP lender approving it in‐house. It is likely this would cause an
extended time required for loan approval.
A borrower must be a US Citizen to apply for an SBA loan. A borrower cannot be a felon.
SUMMARY
SBA loans are our bread and butter. This is how we get deals in the $250k to 1 million-plus range done
on a good business with documented cash flow. Seller’s usually does not want to be the bank. This is how
they get 90% ‐ 100% of their money at the closing table. Good working knowledge is very important.
