There is a general misconception in the small-business acquisition marketplace that a person could easily purchase any type of business through the SBA with a low down payment and get a loan for the rest. Most people also believe that SBA loans are a major source of small business financing. But data shows that SBA-guaranteed loans make up a small portion of the value of the overall small business lending market.

What You Need to Know About the SBA Business Loan Program

The SBA’s primary business loan program — the 7(a) program — is designed to help businesses that otherwise might face challenges in getting approved for loans by guaranteeing a part of the funding provided by financial institutions. 

The 7(a) program is used for a variety of business purposes. 

With that said, specific criteria must be met in order to be approved for SBA financing for a small business acquisition. Contact us and we can provide the most recent information as SBA regulations and qualifications may change or be revised.

Three Guidelines You Must Meet to Be Approved for SBA Financing

1. Cash Flow is King 

All business acquisition loans are evaluated based on the historical cash flow reported in the business’s tax returns. 

The performance of the business subsequent to the most recent year’s tax returns is important, but your lender will be relying heavily on the cash flow reported in the tax returns to ensure that there is sufficient cash flow to repay the loan. 

Your lender will also be evaluating your personal financial situation to understand what your personal debt obligations are and how much money you need to withdraw, if any, from the cash flow of the business. 

2. Experience is Important

Your lender will want to know why you are qualified to own and operate the business you want to buy. If you don’t have experience owning, operating, or working within a similar type of business, you will need to make a strong case that you have professional experience.

3. Create a Business Plan 

Even borrowers with extremely strong industry experience will be asked, at a minimum, to create financial projections that reflect the borrower’s estimates of revenues and operating expenses after the business is purchased. 

Many lenders will require all borrowers applying for a business acquisition loan to provide a business plan, regardless of experience. Borrowers with less impressive resumes can attempt to mitigate their lack of experience by providing a thorough, comprehensive business plan that shows the lender they have completed a substantial amount of due diligence on the business being purchased.

Also not well-understood, is that in the eyes of the SBA, not all business types are created equal. Some categories of small to medium size businesses are more likely to receive SBA loans than others. 

Which Businesses Are Most Likely to Receive an Approval?

Mr. George Heaslip, known as “The Loan Professor,” is a SBA loan originator based in Florida with many years of experience. The following list represents his ranking of business types in alphabetical order using a 0-5 numerical rating, five being the most likely to receive loan approval:

3 A/C and Heating

2 Advertising / Promotion

3 Agricultural (sod, seeds, equipment)

2 Aircraft Maintenance

1 Air Duct Cleaning

2 Alarm Companies (Residential and Industrial)

2 Amusement / Theme Parks with real estate

4 Animal Care & Grooming Facilities with R.E.

2.5 Animal Grooming, without real estate

2 Antiques Dealer

3 Appliance Sales / Repairs

2 Art Gallery

2 Arts and Crafts

2 Art Framing

4 Assisted Living Facilities, with real estate

4 Auto Body Shop, with real estate

3 Auto Body Shop, leased facility

4 Auto Car Wash, with real estate

3 Auto Dealership (new, larger facility)

0 Auto Delivery

2 Auto Glass

0 Automobiles, Rental

4 Auto Parts Shops, with real estate (including tires)

3 Auto Painting, with real estate

2 Auto Painting, without real estate

3 Auto Parts / Accessories, leased facility

2 Auto Repair Shops, with real estate

2.5 Auto Sales Centers, with real estate

2.5 Auto Salvage

1 Awards / Prizes Engraving

3.5 Baker, with real estate (in business several years)

2 Barges (sea transport)

3.5 Bar / Restaurant, with R.E. (operating several years)

1 Beauty Salons / Tanning Salons

3 Bed & Breakfast, established, with real estate

1 Billiard Parlor

3 Boat Storage Facilities, with real estate

0 Boat Tours

1 Book Store

1.5 Bookkeeping Services

1.5 Boutiques

3.5 Bowling Alley Lounge & Restaurant, with real estate

2 Bridal / Baby Shops

2 Building Materials

2.5 Building Renovations

1.5 Business Brokerage Franchise Offices

0 Cards, Greeting

2 Carpet Cleaning

4 Car Wash, Established, with real estate

1.5 Cartridges Refill (Printer)

3 Catering Facilities, Established, with real estate

3 Cement Products Manufacturer, with real estate

4 Child Care Centers, with real estate

2 Child Care Centers, without real estate

1.5 Chiropractic

0 Cigar Store

2 Cleaning, Clothing

3 Cleaning, Janitorial

3 Closet Interior Manufacturers

2 Clothing

3 Coin Laundry

0 Collection Agency

1 Computer Supplies

2 Construction / General Contractor

4 Consulting Companies with exceptional tax returns

3 Consignment Shops

3 Contractor, established

1 Convenience Stores, without real estate

2 Convenience Stores, with real estate

3 Crane Services (Construction / Equipment Install)

2 Damage Restoration

0 Data Management

3 Deli, with real estate

2 Delivery Services

4 Distribution Centers, with real estate

3 Distribution Centers, without real estate

5 Doctors

2 Document Shredding

4 Dog & Cat Kennels, with real estate

3 Dry Cleaners & Laundromats, without real estate

2 Dry Cleaners, with real estate

2 Educational / Schools

2 Embroidery Services, with commercial accounts

3 Electrical Contractors

2.5 Employment Placement Companies

3 Environmental Cleanup

1 Electronics / Computers

2 Equipment Sales, Service, & Rentals

3 Equipment Sales, Service & Rentals, with real estate

4 Equipment Suppliers / Installers

1 Event Planning

4 Export Products Manufacturers

4 Exterminating Companies

4 Fabrication Factories, with real estate

4 Factories (Manufacturing)

3 Farm Equipment Sales & Service

4 Fast Food Franchise, with R.E. (on Franchise registry)

2 Firearms

3.5 Fireplace & Furniture Manufacturers

2 Fish Farm

0 Fishing Vessels

3 Fitness Health Club, not leased

3 Flooring Contractor

2 Floral Center

2 Food Business, Retail

3 Freight Forwarding, with real estate

5 Funeral Homes, with real estate

0 Game Room

3.5 Garden Centers, Indoor & Outdoor, established & growing

2 Gas Station / Truck Stop, with real estate

1 Gas Station with Convenience Store

0 Gift Shop

3 Glass Company

1 Gourmet Catering

3.5 Gravel Pits & Dredge Companies

3 Grocery Store, with real estate

2 Grocery Store, without real estate

2 Guard Company, security

1 Gyms

0 Hair Salon

5 Hardware Stores, with R.E. & no big box competition

3 Health Products Store

1 Hobby Shops

4 Home Health Care Services

2 Hotels and Motels

1 Ice Cream / Yogurt Shops

0 Import Companies

2 Insurance Agencies (franchise)

4 Interior/Exterior Design Units Mfg (Closet,Fireplace,BBQ,Patio)

1 Internet Related

3 Janitorial

4 Janitorial Service Companies (incl. parking lots maintenance)

2 Jewelry / Retail

3.5 Landscaping with commercial accounts

1.5 Landscaping without commercial accounts

2 Landscaping companies with legal employees

4 Law Firm

0 Limo Business

3 Liquor Package Store, with real estate

2 Liquor Store without real estate

2 Locksmith

4 Machine Shop, with real estate

3 Machine Shop, without real estate

1 Maid Service

2 Mail Package Service

5 Manufacturing Facilities, with real estate

5 Manufacturing Facilities that export

4 Manufacturing Facilities, without real estate

3 Marinas, with real estate

3.5 Marinas, with established restaurant and real estate

2 Marine Related

1 Marketing Company

1 Massage

5 Medical Related, with real estate

4 Medical / Supplies / Distribution, leased facility

3.5 Metal Fabricators, with real estate and growth record

0 Micro Breweries

3.5 Millwrights

2 Movers

0 Nail Salon

2 Nursery / Plants

4.5 Nursing Home, with real estate

3 Nursing Home, without real estate

2 Nutritional Store, if a franchise on registry

2 Painters

2.5 Parking Lot Cleaning & Maintenance

1 Party Goods

4 Pawn Shops, if in a freestanding building

2 Personal Services

0 Personnel & Staffing

2 Pest Control

4 Pet Centers, with real estate

4 Pharmacies

5 Pharmacies that do compounding

1 Pizza Shop

0 Pressure Cleaning

4 Preschools, with real estate

2.5 Preschools, without real estate

1 Printing & Typesetting

3 Plumbing Supply

2.5 Pool and Spa

5 Recycling Facilities, established, with real estate

1 Rental Business

2 Repair Services, if licensed

4.5 Restaurants, with standalone bldg., in business many yrs

3 Restaurants, franchises, with excellent financial records

2 Restaurants, other

3 Retail Misc., with standalone bldg., in business many yrs

4 Retail, with 3 yrs of excellent historical cash flow

3 Roofing Contractor

4 Roofing Maintenance

1 Routes

2 Security Systems

5 Self-Storage Facilities

2 Sign Companies

2 Site Preparation

0 Skin and Massage

2.5 Recreational Facilities and Clubs

1 Security Related

1 Shoes / Shoe Repairs

2 Skating Rinks, with real estate

2 Sod Distribution

3 Software Service, with 3 years steady growth

3 Sports Bar, established, with real estate

2 Sports Related

2 Sub Shop (Sandwiches)

1 Tailoring

1 Tax Preparation

1 Telephone Related

5 Therapy Centers and Therapy In-Home Services

1 Tobacco Related

3 Towing Service

3 Trade Contractor

4 Training School, with real estate

2 Training School, without real estate

2 Transportation

0 Travel Agency

2.5 Tree Farm

3 Truck Repair, with real estate

2 Truck Repair, without real estate

4 Truck and Car Washes, with real estate

4.5 Truck Fleet Service (Towing & Repair), with real estate

1 Tutoring

0 Valet Parking

2 Variety Store, non-franchise

3 Variety Store, franchise with real estate

0 Vending Machine Route

0 Video Related

4 Uniforms Manufacturing, with real estate

0 Used Car Dealership / Lots

2 Water / Damage Repair

2 Water Purification

1 Web Hosting

2 Well Drilling

3.5 Wholesale Distribution, with real estate

2 Wholesale Distribution, without real estate

2 Yogurt Shop

SBA loan requirements change frequently. Individual lenders may apply stricter standards than SBA’s minimums. Before making any decisions, confirm current requirements with an SBA-approved lender and on SBA.gov. This article is for general information only and isn’t legal or financial advice. We invite you to contact our professionals at CBB to give you the latest information and guidance. 

Selling Your Business? Get It Prequalified

So, how does this benefit sellers and buyers?

Well, sellers whose businesses have good financial records (normally three years worth of tax returns) may get lenders to pre-qualify their listing for an SBA loan. 

Now keep in mind that the prequalification applies to the business NOT to the buyer! Buyers must qualify on their own merits. This normally means having good credit, some level of expertise in the business being bought, submission of personal financials (net worth) and the ability to personally guarantee the loan.

So, if you are a seller, ask your business broker to look into pre-qualifying your business for an SBA loan. 

How Buyers and Sellers Benefit From SBA Lending Policies

How does this benefit sellers and buyers?

Sellers whose businesses:

• Have good financial records (normally three years worth of tax returns)
• Show enough cash flow to cover the repayment of the SBA loan and the buyer’s life style
• Selling their business for at least $300K

should get a PLP Lender to pre-qualify their business. 

Sellers benefit because when a business is Prequalified, it increases the market potential to more buyers who can now afford the purchase of the business, due to the lower required cash investment. 

This prequalification is based completely on the business and the buyer will need to qualify to get the SBA loan to purchase the business. Buyer qualification includes a satisfactory credit history, management expertise in the business, completion of a SBA personal financial statement and the ability to personally guarantee the SBA loan. 

Prequalification is a powerful tool, but sellers and buyers alike should understand a critical reality: the landscape of SBA lending has evolved, and many banks today go well beyond the SBA’s stated requirements when it comes to collateral.

SBA rules and lender policies change frequently. This information is for general purposes only. Please verify current requirements with the SBA and a professional business broker like CBB before making any decisions. 

SBA Loans Are Misunderstood — Most Require Collateral

Deals are often structured using any combination of the following:

• A portion of the purchase price is financed by the seller.
• Buyer using qualified retirement funds with no tax penalties.
• Private equity.
• Buyer’s friends and family.

Given both the opportunities and the hurdles that SBA financing presents, one of the smartest moves a buyer can make is to get prequalified with a lender before making an offer. While a prequalification is not a loan commitment, it shows sellers and brokers that the buyer is serious and helps position them as a credible candidate in any deal. 

Get Reviewed and Prequalified For Financing So You Can Leverage Your Business Purchase

Getting prequalified for financing by lenders is very important for two specific reasons.

1) Most of all small businesses sold have some form of financing involved.

2) One of the biggest reasons that deals fall through is because the buyer could not obtain financing.

While some sellers are willing to provide partial financing to a qualified buyer, they would much rather the buyer be able to get third party financing so they can receive their cash up front at closing. Wouldn’t you? The seller takes a considerable risk on a buyer they  don’t know too well and can only hope that the buyer will be successful in running the operation.

Having a lender review a buyer’s financial standing and background upfront offers real advantages. Many lenders can indicate which types of businesses they would consider financing based on the buyer’s skills and experience, and which of those skills may transfer to other industries. This helps buyers narrow the types of businesses they research and identify a realistic price range to target, although the final figure will depend on the specific business and the lender’s underwriting. 

Let Our Expertise Guide You in Buying or Selling a Business

All of this adds up to the serious, prepared, perfect buyer! A rare species in the land of business brokerage. You’d get the red carpet treatment for sure by business brokers and sellers alike.

Keep in mind that the business you choose must also be financeable. The business must pass the lenders test. For instance, the company’s financials must be reviewed by the lender so they can determine if the business can produce the income required for you to make a living after making payments on the loan that they will be providing.

The point to be made here is that you, as a person looking for the “perfect” business to buy, will be ready to pull the trigger when it appears. There are more buyers than sellers in today’s business transfer marketplace. You will have an advantage, you will be a step ahead of the rest of the crowd.

Let’s get started: We’ll provide the information and insight you need to help you be successful in this venture.