Question:

I am interested in buying a business that is for sale for $2 million, with annual earnings of $500k. I am planning to use $500k in home equity for the purchase, but the seller is not willing to offer financing. What are my odds of being able to come up with financing for the $1.5 million balance? I’m told the SBA is my best option.

Answer:

Although I do not know many of the additional details regarding this business,

it is likely that your best option will be an SBA backed loan through a traditional lender.

While the SBA itself does not make loans, they guarantee up to 75% of a loan that a traditional lender

will make under the SBA’s 7(a) program. The maximum loan amounts change periodically and today they’re at $2,000,000 which works well for your situation.

As I’m sure you can appreciate, there are numerous conditions attached to SBA loans and some points to note about them which are as follows

(see also the SBA website: http://www.sba.gov/ )

• The business must demonstrate that it can support the debt based upon prior year’s tax returns.
• The buyer’s required down payment can vary, but generally is around 20%.
• Recently, a number of SBA deals I have been involved with require the seller to participate in the financing as well for around 10% and be in second position to the bank.
• The SBA wants to have as much security as possible for the loan through a combination of the business’ and your personal assets.
• Loan fees are quite steep; however, the SBA will finance them over the term of the loan (how nice!). Nevertheless, the fees are generally meaningless relative to getting the financing and completing the acquisition.

There are number of articles in the buyer section of this website that deal with financing a business purchase, SBA loans and other options.

It is well worth you reading them all.