Using the SBA 7(a) Loan as a Business Acquisition Loan

Whether you’re purchasing a new business or buying out partners from your current company, you’ll likely need a small-business loan to help you finance the acquisition. SBA 7(a) loans — the most popular of the U.S. Small Business Administration loans — can be a good option for business acquisitions, offering competitive interest rates and long repayment terms.

SBA 7(a) loans are the most flexible type of SBA loan and can be used for a variety of purposes, including buying a business. Although bank and online loans can also be used as business acquisition loans, here are some reasons why you might prefer an SBA loan:

• Large loan amounts. SBA 7(a) loans are available in loan amounts of up to $5 million.

• Long repayment terms. These loans have repayment terms of up to 25 years.

• Competitive interest rates. SBA loan rates are subject to maximums set by the SBA. Currently, SBA 7(a) loan rates range from 10% to 12.5%.

• Government guarantee. The SBA guarantees 85% of your loan if it’s less than $150,000 and 75% if it’s more than $150,000. This security makes lenders less hesitant to work with small businesses.

• Easier to qualify for than bank loans. Although you’ll likely need good credit and multiple years in business to get an SBA loan, these loans are typically easier to qualify for than standard bank loans.

• Express option. Part of the 7(a) loan program, SBA Express loans can also be used for business acquisitions. Although these loans have smaller funding maximums (up to $500,000), they are faster to fund — lender-approved applications receive a response from the SBA within 36 hours.

The SBA refers to a business acquisition as a “change of ownership.” You can use an SBA 7(a) loan for ownership changes in the following scenarios:

• A small business purchases 100% of the ownership interest in another business.

• An individual who is not an existing owner purchases 100% of the ownership interest in the business.

• A small business acquires another small business through an asset purchase.

• An Employee Stock Ownership Plan (ESOP) or equivalent trust purchases a controlling interest (51% or more) in the employer small business.

The SBA also requires that any change of ownership promotes the development and/or preserves the existence of the business.

In order to qualify for an SBA business acquisition loan, you’ll need to meet eligibility criteria from the SBA as well as your lender.

• You must be a for-profit business.

• You must be located and doing business in the U.S. or its territories.

• You must be operating in an eligible industry.

• You must be a small business, as defined by the SBA.

• You need to have tried to find other forms of financing before turning to an SBA loan.

• As a business owner, you must have invested time and money into the business. 

For business acquisition loans, the SBA also requires one of the following, depending on which applies to your situation:

• For new ownership. An equity injection of at least 10% of the total project costs. This includes all costs required to complete the change of ownership, regardless of the source of funds.

• For a change between existing owners. If the 7(a) loan will finance more than 90% of the purchase price of a partner buyout, the remaining owner(s) must certify that they have been actively participating in the business operation and held the same or an increasing ownership interest in the business for at least the past 24 months. In addition, the business balance sheets for the most recently completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership. If the lender cannot document that both of these requirements are met, the remaining owners must contribute cash equal to at least 10% of the purchase price of the business^[0]

SBA lenders, typically banks and credit unions, set their own minimum qualifications, but generally use the following criteria to evaluate loan applications:

• Personal credit history. You’ll need to have good credit to qualify for an SBA loan. Lenders will usually want to see a personal credit score of 690 or higher.

• Time in business. Most SBA lenders will require that you have at least two years in business. You should have an established company or be looking to buy an established company in order to qualify for a business acquisition loan.

• Business finances. Lenders will want to see that you have strong business finances that show your ability to repay the loan, including annual revenue and cash flow projections. The lender will also want to see your financial history to ensure that you can responsibly manage the business acquisition while taking on new debt.

• Collateral. Because business acquisitions can be complex and expensive, it’s likely that your SBA lender will ask for collateral to secure your loan. Real estate, equipment and inventory can all be used as forms of collateral.

If you think an SBA loan is a good fit for your business acquisition, you’ll want to start the application process by finding a lender. You might start your search with a local bank or credit union in your area, especially if you have a preexisting relationship with that institution.

You can also use the Lender Match tool on the SBA’s website. With the Lender Match tool, you submit some basic information about your business — and in two days, you receive an email with possible lender matches.

Once you’ve found a lender, you’ll be able to work on preparing and submitting your application. Although the required documentation can vary from lender to lender, you’ll typically need to provide:

• SBA Form 1919, Borrower Information Form.

• Financial statement and personal background (SBA Form 413 and SBA Form 912).

• SBA Form 148, Unconditional Guarantee (or the lender’s equivalent).

• Business financial statements, such as balance sheets, profit and loss statements, and projected cash flow statements.

• Business certificate or license.

• Resumes for each business owner.

• Business overview and history.

• Existing debt schedule, if applicable.

• A current business valuation.

• An analysis detailing how the change of ownership will promote the development and/or preserve the existence of the business.

• Business, stock and asset purchase agreements.

• Seller’s financial information.

SBA acquisition loans will require additional documentation, like a business valuation and purchase agreements, that may not be necessary for other SBA loans. Your lender will be able to help you complete the application and answer any questions you have about the paperwork you need.

After you’ve submitted your application, you’ll wait for approval. If your SBA lender is a Preferred Lending Partner, or PLP, you may receive a decision faster — as these lenders can make credit decisions without sending applications through the SBA. Overall, time to funding typically ranges from 30 to 90 days.

The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. Pointypress recommends comparing small-business loans to find the right fit for your business.