How Small Businesses Can Finance an Acquisition through an SBA Loan

November 4, 2021

In a record setting era of mergers and acquisitions, the question of whether to buy or sell a small business has become more prominent. In an economy with record-low interest rates, many have utilized favorable financing options to complete small business acquisitions. But, there is a pool of small businesses looking to complete an acquisition for purposes of entering new markets, increased scalability, or to gain access to new products & capabilities that have been turned away from traditional lenders due to default risk from poor credit history or other financial conditions. The federal guarantee behind the SBA program leaves lenders with the confidence to lend to small businesses that may have been turned away from traditional financing measures. This allows for the environment of acquisitions in the small business sector to be more accessible and help companies find their true potential.

The general use (7a) SBA Loan is the most popular for financing an acquisition. In utilizing this program, business owners have the ability to borrow up to $5,000,000 (after meeting certain requirements). Lenders involved in the SBA program are able to finance up to 90% of the acquisition, with the remaining 10% financed by the owner via equity or a seller's note.

In a recent survey by Guidant Financial asking about non-covid challenges for small business owners, 23% of respondents listed lack of capital/cash as a major challenge (the highest rating). But, in looking ahead, 49% of small business owner respondents plan to increase their staff or expand their business. Additionally, 55% plan on pivoting their strategy toward digital and allocating the appropriate amount of capital spend in order to be optimal.

General Requirements of the SBA 7(a) Loan

Business Requirements

-Your Business Must be Based in the US

-You must have invested in the business yourself

-You must be a for profit business

-You must have tried but been unable to secure financing from traditional lenders

Information for Lender (Varies)

-The amount of money you want to borrow and its purpose.

-A business plan. Because you’re acquiring a new business, this should include post-acquisition plans and why it’s the right acquisition for you.

-Business Financials (Tax Transcripts, P&L, Balance Sheet)

-Personal Financials (Tax Transcripts, Credit History, Personal Income)

-Owner Experience (Industry Experience, Business Length)

-Collateral. (Stock, Property, or Other Assets)

Final Thoughts

Financing options, such as the 7(a) SBA loan program, are fueling entrepreneurship across the US and creating opportunities for business owners that may not have been available prior. In 2020, there were 31.7 million businesses recorded in the US. It is anticipated that this number will continue to grow as many individuals in the pandemic and beyond have shifted to following their ideas and side hustles. Additionally, companies like MicroAcquire, are now making it easier than ever to buy and sell a small-medium sized business.  Continuing to fuel entrepreneurship and create opportunities for those that may not have had access to them prior.

Although hardships have been faced due to the pandemic and uncertainty that has arisen, small business owners still remain resilient. The SBA loan programs and other alternative financing institutions are making it possible for these businesses to thrive, while also helping in the growth of the economy by hiring workers and contributing to their respective communities.

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