Buying a Business

How to Buy a Business with an SBA Loan in 7 Easy Steps

For many aspiring business owners, the most significant obstacle is financing, but buying an existing business is a quick way to get set up for success. Fortunately, there are several ways you can fund your business dream, and one of the most popular is through an SBA loan. In this guide, we'll go over everything you need to know about how to buy a business with an SBA loan.

Is it a Good Idea to Buy an Existing Business?

For those interested in becoming a business owner, buying an existing business can be a great way to get started. Unlike starting from scratch, purchasing an established business can eliminate the anxiety and expense that comes with building from the ground up. In addition to avoiding start-up costs such as marketing, branding, and website development, an existing business also typically has an established customer base and reputation in the community.

Ultimately, buying an existing business can provide a strong foundation for future success, making it a great option for those who are eager to become business owners without taking on all of the risks of starting a new venture from scratch. Before we dive into how to buy a business with an SBA loan, let's cover some details on what they are.

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What is an SBA loan?

The Small Business Administration (SBA) loan is a lending option specifically designed for small business owners. It's a government-backed loan that helps businesses get financing at a lower interest rate. The SBA loan programs have different types of loans, including SBA 7(a), SBA Express, and SBA 504. Each of these loans has its own requirements, terms, and loan limits. These loans are provided by SBA-approved lenders who partner with the SBA to offer these loans at favorable terms.

Related Reading: The Complete Guide to SBA Loans

Types of SBA Loans You Can Use to Buy a Business

The most common type of SBA loan is the 7(a) loan, which is designed to help small businesses start or expand their operations. This loan can be used for a variety of business purposes, including purchasing inventory, equipment, and machinery, refinancing existing debt, and acquiring real estate.

The SBA Express loan is another type of loan designed to help small businesses get access to capital quickly. This loan typically has a faster approval process, and the loan amount is based on the borrower's credit history and business cash flow. With an SBA Express loan, you can borrow up to $350,000 to use for a variety of business purposes, including working capital, inventory, equipment purchases, and more.

The SBA 504 loan is intended for small businesses that need to purchase or improve real estate or equipment. This loan is structured differently than the 7(a) loan, as it involves two loans with two different lenders. Under this loan, the SBA provides up to 40% of the total loan, while the lender provides 50%, and the borrower contributes the remaining 10%.

How to Qualify for an SBA Loan?

SBA loans are highly sought after because they have lower interest rates and more favorable terms than traditional business loans. However, they can be challenging to qualify for, and the requirements vary depending on the lender and the type of loan you're seeking.

To qualify for an SBA loan, you'll need to have a good credit score (typically around 650 or higher), significant collateral, and a solid business plan. The SBA also has specific eligibility requirements for certain types of businesses. For instance, businesses in the gambling industry are generally not eligible for SBA loans, while businesses in industries like healthcare are favorably reviewed.

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light bulb green icon Fundid Recommendation: We've partnered with Lendio to bring your a simple way to access the funding you need for your business. Whether you are looking for an SBA loan or a business acquisition loan, you can compare your options by submitting one application.

Lendio's basic requirements for SBA loans:

  • 600+ credit score
  • At least $8,000+ in monthly revenue
  • 2+ years time in business

See if you are eligible for free with no impact on your credit.

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Expert Tips for Buying a Business with an SBA Loan (4 Things to Consider)

Before buying a business with an SBA loan, it's essential to do your due diligence. You need to ensure that the sale price is realistic and that the company is a good fit for you. Additionally, it's important to work with an experienced business broker who can guide you through the acquisition process, from identifying potential businesses to closing the deal. Additionally, you want a strong legal team, which can help review all the paperwork and ensure that the deal is structured correctly, and also make you familiar with all the contractual obligations that come with the purchase.

1. Consider the Type of Business You're Buying

When you're considering buying a business with an SBA loan, one of the first things you should do is think about the type of business you're interested in. Are you looking for a small mom-and-pop shop, or are you interested in a larger franchise? The type of business you're interested in will play a big role in how much money you'll need to borrow, as well as what kind of collateral you'll need to put up.

2. Consider the Location of the Business

Another important factor to consider when you're buying a business with an SBA loan is the location of the business. If the business is located in a high-crime area, or if it's located in an area that's prone to natural disasters, it may be more difficult to get financing. Additionally, the location of the business will affect how much foot traffic it gets, which can impact its profitability.

3. Consider the Financial Health of the Business

When you're considering buying a business with an SBA loan, it's important to look at the financial health of the business. You'll want to look at things like the business's revenue and expenses, as well as its outstanding debts. This information will give you a good idea of whether or not the business is a good investment.

Related Reading: Top Financial Statements Every Business Owner Needs to Know

4. Consider Your Own Financial Situation

Finally, when you're considering buying a business with an SBA loan, you'll need to take a look at your own financial situation. You'll need to make sure that you have enough money saved up for a down payment, as well as enough money to cover the costs of running the business. Additionally, you'll need to make sure that you have good credit so that you can qualify for a low-interest loan.

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7 Steps to Take to Buy a Business with an SBA Loan

If you're looking to purchase a business with an SBA loan, there are some important steps that you should take to be successful.

1. Find the Right Business

The first step in buying a business with an SBA loan is to find the right business. This means finding a business that is a good fit for you and your goals. There are a number of factors to consider when choosing a business, including the industry, the size of the business, and the location.

2. Determine Your Eligibility

The first step in applying for an SBA loan to buy a business is to determine your eligibility. To be eligible for an SBA loan, you must be a U.S. citizen or permanent resident and have good credit. You will also need to provide collateral for the loan, which can be in the form of real estate or personal assets.

3. Find a Lender

Once you have determined that you are eligible for an SBA loan, you will need to find a lender that participates in the program. There are a number of banks and other financial institutions that participate in the SBA loan program, so you should have no problem finding one that meets your needs.

4. Submit Your Application

Once you have found a participating lender, you will need to submit your application for the loan. The application process will vary depending on the lender, but you will typically need to provide information about the business, financial history, and collateral.

5. Review Your Loan Offer

Once your application has been approved, you will receive a loan offer from the lender. It is important to review the terms of the loan offer carefully before accepting it, as you will be responsible for repaying the loan according to those terms.

6. Close on the Loan

Once you have accepted the loan offer and signed the loan agreement, you will need to close on the loan. This process typically involves paying closing costs and providing additional collateral, such as a deed of trust or promissory note.

7. Start growing your new business

Now that the transaction has been completed, it's time to focus on the future and grow your newly acquired business. Whether you plan to expand the current customer base, improve operations, or introduce new products and services, your SBA loan gives you the resources and flexibility you need to do it. This is an exciting and challenging venture, but with the right mindset and dedication, you can turn your business into a thriving enterprise for years to come. 

Secure an SBA Loan to Purchase a Business

Buying a business with an SBA loan is a smart financing option for small business owners who want to acquire an existing business. However, this process can be complex, and it's essential to work with experienced professionals to navigate the process effectively. If you're interested in purchasing a business using an SBA loan, contact an SBA-approved lender to see what loan options are available to you. With the tips highlighted above, you're well on your way to creating a successful business. Explore small business lenders through the Fundid Capital Marketplace.

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