Here’s How To Use SBA Loan To Buy Another Cash Flow Positive Company: 7 Things To Know

The Small Business Administration, a federal agency, helps small businesses get needed credit by offering government guaranties on loans made by commercial lenders. So, the bank or lender makes the loan and the SBA will repay up to 85 percent of any loss in case of default. Applications are submitted to the bank and loan payments are also paid to the bank. The SBA doesn’t issue loans itself, but works instead with lenders and commercial banks to overcome obstacles to business lending, such as guaranteeing loans, reducing risk, and sourcing capital.

For entrepreneurs, using SBA loans to buy another cash flow positive company is a legit and fortuitous option.

Positive cash flow indicates that a company has more money moving into it than out of it.

Here are seven things to know about how to use an SBA loan to buy another cash flow positive company.

1. What’s the best SBA loan for acquisition?

If you’re looking to buy or sell a business, it’s worth considering an SBA loan. Through SBA financing, the bank offers businesses a long-term loan at fair rates and fees. Typically, the SBA guarantees up to 75 percent of the loan. 

The SBA’s most popular loan is the general-use 7(a) loan, and experts say it’s ideal for acquisition finance, Entrepreneur reported. An SBA 7(a) loan is a small-business loan issued by a private lender and partially backed by the U.S. Small Business Administration. In fiscal year 2021, the SBA guaranteed nearly 52,000 7(a) loans, according to the Congressional Research Service.

You can borrow up to $5 million. This is more than enough for acquisitions of small or even medium-sized businesses.

2. An Easier loan process

Getting an SBA loan to finance an acquisition is relatively simple. It doesn’t matter whether you’ve been declined credit before or have a poor credit history, you might still qualify for a loan, according to the SBA. There are certain eligibility requirements, however. Among them are:

  • Your business must trade in the U.S.
  • You must have invested in the business yourself.
  • You must be a for-profit business.
  • You must have tried but been unable to source funding from traditional lenders.

3. Extra loan benefits

The are various benefits that come with SBA financing, such as working capital, equipment purchases, and other uses of proceeds may be included in the loan. On top of this, there’s no balloon payment. Because of this, the buyer has more financial freedom early in the process. The SBA loan’s longer amortization also helps with cash flow. Amortization is usually up to 10 years. Amortization refers to the amount of principal and interest paid each month over the course of your loan term. Near the beginning of a loan, a large part of your payment typically goes toward interest — but this is not the case with an SBA loan because of the longer amortization.

4. It’s all in

You cannot use an SBA loan to partially buy into a business; it has to be used for a total acquisition of a company. One owner can buy out another, or a new buyer can purchase an entire company. And if you have an existing business you can use an SBA loan to purchase another company.

“Using an SBA loan to acquire a business is an idea worth considering if you don’t want to start a business from scratch. However, you shouldn’t step in blindly,” advises Certified Financial Education Instructor Choncé Maddox, founder of My Debt Epiphany money management platform.

Maddox told The Moguldom Nation, “The SBA only lets you do this if you’re buying 100 percent of a business and not just partially. I wouldn’t look at this as a major shortcut because you’ll still need to go through business valuation and make sure the numbers make sense. Just because a business performed well under different ownership doesn’t mean you’re guaranteed to experience the same thing, so that it can be a risk in that sense.”

Maddox cautions that you must take into account all of your business expenses when applying for an SBA loan. “Also, consider how much you’ll need if you’re looking to upgrade the physical location, order more equipment, or make other changes. All this adds up, and you don’t want to take on additional debt without carefully fleshing all your ideas and priorities out,” she said.

5. A 90 percent loan deal

An SBA loan can finance up to 90 percent of the purchase price, according to Banner Bank. But If the seller is open to carrying a portion of the financing, it could be favorable for the seller. The advantages may include better terms, lower cash down payment for the buyer, and a possible tax savings for the seller.

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6. The pluses

Using an SBA loan to purchase a business has many pluses, Maddox told The Moguldom Nation.

“I’d say the benefits, though, are: Immediate cash flow–if you’re purchasing a business that has ongoing income and earns a profit; Foundation to start with a built-in network of customers,
products/services that perform, and a general understanding of what’s currently working in the business,” she said.

Also, since the company is already in existence you might not have a lot of startup costs. “You may not have to do as much marketing or promotion when you get started and you can redirect some of those funds elsewhere,” Maddox said.

7. Last-resort option

It is often difficult for Black entrepreneurs to raise funding and an SBA loan is one option. “When you’ve run out of other options, the SBA can save a potential acquisition deal. But that’s not all. SBA loans are also competitively priced (under 8 percent),” Entrepreneur reported. Since the SBA is a federal agency, it enforces responsible lending and risk management so lenders can afford to charge lower rates and fees.

Photo: Maksym Kapliuk https://www.istockphoto.com/portfolio/Maksym_Kapliuk?mediatype=photography

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