Benefits of Using SBA Loans for Business Acquisitions

We frequently see the SBA 7a loan program utilized to finance the purchase of a business or used for a partner buyout. It makes sense since the SBA allows a 10-year amortization of these loans, while most financial institutions will only provide 5-year loan terms for a business acquisition. Not only does the 10-year amortization make it easier to achieve an acceptable debt service coverage, but the 75% SBA guaranty significantly reduces the bank’s exposure.

The SBA guaranty is especially important with a business acquisition, since the value of the business cash flow creates a goodwill portion of the loan, which can’t always be covered with outside collateral. With a 75% guarantee, at least 75% of the loan is collateralized.

On a business acquisition, we normally see a borrower that has strong management or business ownership experience in the industry of the subject business. If the business is a facility-based business like a hotel or gas station, we generally expect to see good cash flow with debt coverage around 1.25 to 1, up to 1.5 to 1. This is because the acquisition includes the real estate and the business generates its income based on location and demographics of the area. For acquisitions where just the business is being purchased, we generally see a debt coverage of 1.5 to 1 and higher.

In addition to strong management and cash flow, most lenders look for borrowers with clean credit and relative strength in their personal net worth. It is also important that the borrower has adequate post close liquidity to support the business during the transition of ownership.

Business acquisition loans are a great way for a financial institution to grow its C&I portfolio and mitigate its risk, while at the same time providing the borrower with a loan term that enhances their cash flow.

Article by: Brian Carlson