The SBA 7(a) loan program is a great option for financing small business acquisitions. With attractive terms, the program allows buyers to finance up to 90% of their project costs.

Eligible Project Costs The acquisition of an SBA-eligible business and owner-occupied commercial real estate (with a minimum owner-occupancy of 51%) is eligible, as well as:

  • Working capital
  • Closing costs
  • SBA guaranty fee
  • Franchise transfer fee (if applicable)
  • New equipment (if needed)
  • Inventory

Loan Terms The maximum loan term is 10 years if the acquisition doesn’t include commercial real estate. If it does, the term is 10 years for the business acquisition and 25 years for the real estate. If 51% or more of the loan is for real estate, a 25-year term is allowed.

Prepayment Penalties Loans with a term of 15 years or more come with a prepayment penalty of 5% in year one, 3% in year two, 1% in year three, and none after that. The SBA also permits a borrower to prepay up to 25% of the outstanding principal annually without penalty.

Down Payment The SBA requires a 10% equity injection, which can come from the buyer or a combination of the buyer’s 5% down payment and 5% seller financing (if the seller is willing to have their note on standby).

Eligible Sources of Buyer’s Equity

  • Cash in savings or checking accounts (seasoned for 2 months)
  • Home Equity Line of Credit (with a secondary source of repayment)
  • Gifted funds that don’t need to be repaid
  • Seller financing (not exceeding 5% of the 10% equity required)
  • Investor contributions from partners
  • Personal guarantees from individuals who own 20% or more of the business to be acquired.

Collateral Requirements The lender must be in the first position on all assets to be acquired. If there’s less than one-to-one collateral coverage, the lender must take a lien on real estate owned by personal guarantors with 25% or more equity.

Pre-Qualification Documents To pre-qualify for an SBA loan, a lender typically requires:

Seller-Related Documents

  • Last three years of business federal tax returns
  • Interim Profit and Loss and Balance Sheet (as of the last month)
  • Broker’s Confidential Information Memorandum
  • Accounts Receivable and Accounts Payable aging reports (as of the last month)
  • Customer concentration information (for customers accounting for 20%+ revenue)

Buyer-Related Documents

  • Resume
  • Last three years of personal federal tax returns and W2s (if applicable)
  • SBA Personal Financial Statement (Form 413)
  • Credit authorization to obtain credit report
  • Buyer’s transition plan
  • If the buyer owns 50%+ of another business, the lender will also need the last three years’ business tax returns, interim P&L and Balance Sheet, and business debt schedule.

Expect a loan officer to review your pre-qualification package and respond with any initial questions before sending a proposal letter. The timing varies, but it usually takes a few weeks.

For a smoother SBA loan process, consider connecting with a lender from the SBA Preferred Lender Program (PLP) list. PLP lenders can underwrite, approve, and close loans without SBA review, resulting in a faster process. They also have a proven track record and expertise in SBA loans, which is beneficial to borrowers.