We'd like to thank Mark Daoust, owner of Quiet Light Brokerage, for giving us permission to reprint his blog post on SBA loans, part 2 of which is below. Mark is the go-to-guy for the purchase or sale of online eCommerce businesses and if you have an interest in that space, we encourage you to contact him at firstname.lastname@example.org.
The US Government's Small Business Administration lends up to $5 million that businesses that meet certain criteria. The post below talks about the general requirements of an SBA loan while part 2 will get into the process of applying for an SBA loan.
Cheval Capital, Inc.
Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell any stocks mentioned above, a comprehensive discussion of valuation or how to do the calculations discussed. Please be sure to consult your financial advisors when valuing your company, considering the sale of your business or making other financial decisions.
How To Buy An Online Business With An SBA Loan: The Process
[This Introductory section is copied from Part 1 of this post on SBA loans.]
I used to hate it when a buyer suggested using an SBA loan to acquire one of my client’s businesses. But it is an option more and more buyers are opting to use.
During the Great Recession of 2009, SBA-backed loans were extremely difficult to get as the entire lending industry re-evaluated how loans were being written. But today, SBA lending is alive and robust.
My opinion used to be that SBA loans were slow and uncertain. They seemed to be the choice of buyers who really had no other choice. But I was wrong, and I am happy to admit that! SBA loans can be a great option for both buyers and sellers of Internet-based businesses.
So what is involved when applying for an SBA loan? How do you qualify? What does the process look like? I reached out to one of our recommended lenders at a major bank to ask him every question I could think of about SBA loans, as well as relying on our extensive experience at Quiet Light Brokerage.
Working With a Preferred Lender vs. Standard Processing Lender
There are two types of lenders who participate in SBA lending – preferred lenders and standard processing lenders.
The major difference between the two is found in the underwriting process. When you work with a preferred lender, the bank can manage the underwriting process without submitting your paperwork to a regional SBA office for review.
For a standard processing lender, your loan request needs to be reviewed by a regional SBA office.
Working with a preferred lender is usually significantly faster. That said, even if your bank is a preferred lender, they may choose to send your loan through standard processing if there is any uncertainty on the loan.
So just because you are working with a preferred lender, you may still find yourself waiting as the loan is reviewed by a regional SBA office.
Most SBA Loans Are Completed In 45-120 Days
SBA lenders will often tell you they can complete your loan in 30 days or less. While this may be possible, it is our experience that you should count on a significantly longer process.
The SBA process involves a number of people who need to look at and review different parts of your application. Due to this, occasional delays are almost always unavoidable.
Documents You’ll Need Or Want To Speed Up Your Loan Application
The main complaint about SBA loans is the amount of time it takes to process the loans and the tedious nature of those loans.
As mentioned above, the SBA process involves a number of people who will look at different parts of your loan application. Each person has different items they need to examine and therefore each person will need different documents from you.
You can speed up your loan process by having your documentation prepared and ready to submit. The main documents you’ll want to have prepared are:
- Personal Financial Statement – all SBA lenders require a fully completed personal financial statement. (A link to the Personal Financial Statement can be found here.)
- 3 Years Personal Tax Returns – these will be used to validate your financial records.
- 4506-T Form – this is used to validate the accuracy and the filing of your provided tax returns.
- Loan Application Form – this will be bank specific, but since the loan comes from the bank (the SBA only guarantees it), they will likely have a loan application for you to complete.
- Borrower Information Form – this is for SBA purposes and helps them track who is borrowing and how much. This is for statistical purposes.
- Pro-Forma Financial Reports – the bank will want to see your projections for the company you are acquiring.
Some documents they may request are:
- A Business Plan – this seems to be a very common request among banks as it helps them know you have thought your acquisition through (and if you haven’t, it will force you to put some thought into it).
- Your Resume – this helps the bank get an overall picture of your personal qualifications for this business.
- Profit & Loss Statements For Your Businesses – if you have other businesses, and these are funding your acquisition in any way, you’ll need to provide P&L statements for those businesses.
- Balance Sheets – again, this only applies if you are using an existing business to fund your portion of the acquisition, or if you are using a business to demonstrate stronger debt to equity ratios. If you are, you’ll need to provide your balance sheets.
- Miscellaneous Forms – your bank may have additional forms for you to sign either due to their internal practices, or because of your specific type of deal.
Your seller also needs to be organized throughout the process to keep things moving along quickly. Here are some things your seller should be prepared to create and submit:
- 3 Years US-Based Tax Returns – if your seller has not yet filed for the current tax year, be sure this is done before you go through the process as it can take some time to validate a return which has been filed.
- 4506-T Form – the bank will need to see more than just the tax return. They’ll want confirmation from the IRS that the return was filed, paid, and is in good standing.
- 3 Years Of P&L Statements – these should be accurate and kept up to date. The bank may request new P&L statements from time to time. Make sure your seller is aware these need to be completed monthly in a timely manner. If your seller runs more than one business through the same parent company, you’ll need to send P&L statements for all the businesses they run. The bank will need to verify all the numbers match the tax returns exactly.
- A Balance Sheet – this should be current at the time of submitting the loan.
Is Using an SBA Loan Worth It?
Buyers who have been through the SBA process often have similar feedback: it is hard work, takes a bit longer than they expected, but completely worth the headaches. Not only do SBA loans allow you to leverage your purchase price to put less money upfront, they also provide the seller with a solid and competitive offer.
Source: Quiet Light Brokerage Blog