An SBA loan to buy a business is one of the most common ways buyers finance an acquisition without paying the whole price in cash. The loans are made by banks and other lenders and partly guaranteed by the U.S. Small Business Administration, which can make lenders more willing to say yes.
How an SBA loan to buy a business works
The SBA does not usually lend the money itself. Approved lenders make the loan, and the SBA guarantees a portion, which reduces the lender’s risk. Buyers often use the program to finance the purchase of an existing company, and the loan is typically repaid over a period of years.
Rules, limits, and terms change over time and differ between loan programs, so check current requirements with the SBA and with a lender before you plan around any specific number.
What lenders look for
Lenders want to see that the business can repay the loan and that you can run it. They review the target’s financial history, your own credit and experience, and how much of your own money you are putting into the deal.
- Several years of financial statements and tax returns for the business
- A personal financial statement and credit history
- A business plan or acquisition summary
- A purchase agreement or letter of intent
- Evidence of your own cash contribution
- Industry or management experience, or a plan to cover gaps
Prepare before you apply for an SBA loan to buy a business
Start by understanding what the business is worth. Our guide to how to value a business before you buy explains how earnings multiples work, and the due diligence guide shows what to verify. Lenders will often order their own valuation, so unrealistic prices can stall approval.
Talk to an SBA-participating lender early. The SBA Lender Match tool can help you find lenders, and local SBA resource partners and SCORE mentors offer free advice on preparing an application.
Costs and trade-offs
Expect fees, closing costs, and collateral requirements, and be ready for personal guarantees. Compare offers from more than one lender, and read the terms on interest, repayment, and any penalties for early payoff.
Think about how the loan payments will compare with the business’s cash flow after you pay yourself a fair salary. A deal that only works under optimistic assumptions is risky, however it is financed.
Alternatives and combinations
Many deals combine an SBA loan with other sources, such as buyer cash, seller financing, or an earnout agreement. Each piece changes your risk, so review them together with an accountant and an attorney.
Take the next step toward an SBA loan to buy a business
Gather your documents, define your budget, and speak with at least two lenders before you commit to a deal. If you are still searching, read our guide to how to find a business for sale. With preparation, an SBA loan to buy a business can make a purchase possible without draining your savings.
More guidance on an SBA loan to buy a business
- Built to Sell Book: Lessons for Owners Planning an Exit
- How to Find a Business for Sale: Where to Look First
- Can You Buy a Business With No Experience?
- Working With a Business Broker: How to Find One and What It Costs
- How to Buy an Existing Business: A Due Diligence Guide
- How to Value a Business Before You Buy: Multiples and Seller’s Discretionary Earnings
- SBA Lender Match
Sources and background: U.S. Courts.
Keep reading
If this topic is useful to you, these related guides on SmartBizOpps are a good next step.
