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How to Get a Small Business Administration (SBA) Loan

There is much confusion and uncertainty around the SBA loan program. Most major banks have SBA experts who focus on the ever-changing details of the program, so if you have interest in getting an SBA loan to buy a business, please let us put you in touch with an SBA expert we know and trust.

We have completed many business acquisitions that involved SBA-guaranteed lending; here is a brief synopsis of the program.

The Small Business Administration (SBA) is an agency within the United States Department of Commerce. The SBA does not “make the loan”, they guarantee a qualifying loan made by a banking institution. The banking institution takes the risk to make the loan, yet with the guarantee from the SBA on 50-90% of the loan amount. With this guarantee in place, the bank is (in theory) able to make loans they might not otherwise make.

SBA guarantees can be made on loans up to $5 million, and the purposes of the loan can be business acquisition, partner buyout, acquisition of real estate to be used in the business, debt refinancing or working capital.

An individual cannot go directly to the SBA for a loan guarantee. The entire process has to be facilitated through a bank. However, if a bank turns down a loan request, the borrower can go other another bank because each bank has their own basic lending profile, so what’s not good for bank A might be OK for bank B.

SBA guaranteed loans terms are from 10 to 25-years. Some loans are made on fixed rates, some on variable rates; the latter are usually 2.75 points above prime. But given the vagaries of the interest rate market, we encourage you to talk directly to a banker about term and rate expectations. There are fees associated with getting an SBA guaranteed loan, such as the SBA guarantee fee (usually 1%), and of course, there are usually appraisal and/or environmental reports required, as with any bank loan.

Using an SBA guaranteed loan makes particularly good sense when buying an existing business that has goodwill associated with the valuation. The SBA requires a minimum debt-coverage ratio (usually 1.15), which is the cash flow from the business divided by the amount of debt service on the loan. A bank might have higher debt coverage requirements as a way to be more conservative in their decision-making. The higher the debt coverage ratio, the more conservative the banker is being. Banks will usually collateralize their loans through with the business’ accounts receivable, inventory and furniture, fixtures and equipments. But remember, when the bank calculates the value of their collateral, they will NOT look at market value or even book value of the business assets, they will consider only liquidation value.

You can assume an SBA guaranteed loan will require a personal guarantee, even if you have equity in the deal, and even if the loan is fully collateralized. Don’t even ask to have the personal guarantee waived. Moreover, it’s likely the bank will want to get life insurance on the borrower. That’s right, collateral on top of collateral on top of collateral.

The SBA will not provide a loan guarantee if the borrower has defaulted on other government-guaranteed loans, such as a student loan. And finally, the SBA will generally not provide a guarantee if the borrow wants to loan to do something outside their area of experience. Example if you are an accountant for a big hospital company but decide you want to be an entrepreneur and buy an auto repair franchise, you will probably be out of luck when trying to get an SBA-guaranteed loan.

In conclusion, whenever you are seeking to secure an SBA guaranteed loan, or any loan for that matter, remember that you will be evaluated on what is called “the Five Cs of credit: collateral capacity (that’s what the debt coverage ratio tells you); capital (does the borrower have equity invested in the deal?); character (felons need not apply); conditions (what’s going on in the community, in the industry being served, etc.).

Banks want to work with borrowers and having SBA guarantees helps the process. For more information, contact us at any time.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."

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