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5 tips for a buyer to qualify for an SBA loan
| Guest post by: Andrew Rogerson |
Article Overview: A Small Business Administration or SBA loan can help someone in the process of buying a business. When applying for this kind of loan, there are some tips to help with the process. From having positive cash flow, getting a business valuation to understanding loan auditors, these and other tips can help anyone when they are thinking of buying a business and getting an SBA loan.
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Free Download - How to sell a business By Andrew Rogerson |
5 tips for a buyer to qualify for an SBA loan
Obtaining finance to buy a business is particularly challenging. One of the advantages of buying a business in
the United States that very few other countries have to assist with this process
is the Small Business Administration or the SBA as it is commonly called. If you have retirement money in a 401(k)
plan, this money can be used to move into a corporation and fund the purchase
or down payment to buy a business. This
option can be combined with an SBA loan.
Both of these processes are very formal and deliberate and therefore
take time, but if applying for an SBA loan is part of your business acquisition
plan, consider the following 5 tips.
1. SBA lenders make their decision to approve a loan from a
risk model not an opportunity model.
That is, you can have the next best new business idea in the world but
SBA lenders approve loans against cash flow.
That is, if the business exists and it has positive cash flow, that’s
the first thing a lender wants to see.
2. If you want to use the loan to buy an existing business
with a positive cash flow, the banks will understand that the current owner of
the business will most likely have non-business expenses sitting on the
business profit and loss statement so it reduces the amount of tax the business
owner pays. These non-core non-business
expenses are called add-backs and to get at the net operating cash flow of the
business, they will accept a reasonable number and amount of add backs through
a recasting of the financial statements.
These add backs must be legal and easy to identify.
3. A recent requirement to the SBA loan application process
is that the banks need to obtain an independent third party valuation of the
business to support their loan decision process. The valuation must be realistic and
defensible, that is, the appraiser needs to explain in their valuation report
how they arrived at the final value of the business.
4. If a lender approves an SBA loan and the borrower
defaults, the SBA has auditors who look at the loan application and approval
process used by the bank. The auditor’s
ultimate responsibility is to understand the loan application process and why
it was approved and then understands why the borrower defaulted.
5. If the SBA loan auditors are not satisfied the loan
application was handled correctly, they can withdraw the ability of the bank to
approve SBA loans and be covered by the risk mitigation the SBA provides. If the bank does not have preferred lender
status, the bank can be prohibited from applying for presenting loans for
approval.
The bottom line, banks have a lot at stake including not
getting it wrong; so be patient with their process as ultimately the person at
the bank who approves the loan is responsible.
The SBA loan process provides great help to business buyers (and
indirectly, business sellers) as it provides a source of funds for
entrepreneurs. Over recent years those
rules became much more difficult and therefore saw a large drop in the number
of loans approved. This is now starting
to change but a business must present itself in the best light possible to have
any chance of obtaining an SBA loan.
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About the Author: Andrew Rogerson RSS for Andrew's articles - Visit Andrew's website Andrew Rogerson is a 5-time business owner that loves helping entrepreneurs sell or buy a business. Andrew currently holds the Certified Business Intermediary (CBI) designation from the International Business Brokers Association (IBBA), the highest designation awarded by the IBBA. Andrew has also earned the Certified Business Broker (CBB) designation from the California Association of Business Brokers (CABB.) He holds a Certified Machinery and Equipment designation (CMEA) from the NEBB Institute and is a Certified Senior Business Analyst (CSBA) with the Society of Business Analysts. Andrew is a member of the Sacramento Metro Chamber of Commerce and past Chair of the Sacramento Chapter of the California Association of Business Brokers. Andrew is also the author on a series of four books: Successfully Sell Your Business, Successfully Buy Your Business, Successfully Buy Your Franchise and Successfully Start Your Business. For more information go to http://www.businesstransactionbooks.com Click here to visit Andrew's website   Successfully buy a business |
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Loan prequalification & find the right franchise invest.
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Thanks.
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