Funding Your Business Acquisition
February 14, 2017
Don’t Let the Fear of a Commercial Loan Keep You From Pursuing Your Entrepreneurial Dreams
Unless a business buyer is strapped with excess cash or has the financial backing of a strong and willing investor, funding a business acquisition can be a risky and stressful venture. Typically, small business acquisitions and start-ups are funded through loans from banks. Conventional commercial loans can involve short loan amortization periods, balloon payments, high monthly payments, pre-payment penalties and heavy personal guarantees by the borrower.
- The alternative for many borrowers is a General Small Business 7(a) loan through the SBA. An SBA 7(a) loan is a loan provided to small businesses through the US Small Business Administration. These SBA loans are administering through most large and small banks, provided they are approved by the SBA. These loans are beneficial not only to the borrower, but to the bank administering the loan as well.
- First and foremost, these loans are up to 75% guaranteed by the SBA, depending on the loan size. This guarantee reduces the risk exposure to the financial institution and is attractive for those businesses that are deemed risky either due to the nature of the business, the business history, the experience of the borrower or the lack of borrower start-up cash for the investment.
- For the borrower, the SBA program sets limits to the interest rate that can be charged, limits any pre-payment penalties, does not allow balloon payments, and generally has longer repayment schedules. Longer repayment schedules will reduce the monthly loan payments making it easier for the borrower to use operating cash to fund the new business. One common misconception regarding SBA loans is that the paperwork is excessive and the process takes too long. Typically this is not the case. There are additional pieces of information required but experience is that the local banks move through the process very efficiently.
- SBA loan program is intended for small businesses and were created to assist entrepreneurs and grow the backbone of the economy. There are restrictions to the types of businesses that are eligible and how the loan funds can be used, but generally most start-ups and existing business acquisitions can be funded through the SBA loan program. For real estate purchases, a separate 504 loan program is available. The SBA website is a great resource for information as is your business banker from most local and national banks.