Q: We have $40,000 to start a new business. But the business we want costs $200,000. The actual owner is not reporting the exact amount of money that the business produces. How can I convince the SBA to give me the loan? Our credit is perfect and we own 2 houses.
A: Thank you for your inquiry.

First let me clarify one thing: the SBA does not lend money.

Rather, they guarantee a certain percentage on loans that traditional lenders may make for small business acquisitions.

That being said, there are two fundamental aspects to the requirements of an SBA loan. First, the business itself must qualify. Second, the buyer must qualify from a credit, experience, and guarantee standpoint.

It sounds like you may meet the requirements; however, the business may not. For the business to qualify, the lenders use a formula based upon the prior two to three years of tax returns, reducing the Seller’s Discretionary Cash Flow by an adequate wage amount for the new owner.

Then they calculate the debt service to be certain the business can afford the payments. If this seller has not been reporting the total revenue, the business may not have enough demonstrative proof of being able to service the debt. If that is the case, you should pursue a seller financed deal. Notwithstanding this, it’s well worth you meeting with a “Preferred” SBA lender to discuss the deal. At the very least, it will show the seller the challenge that every buyer will face who does not have more liquid cash to use as a down payment.

This situation is a perfect example of how business owners quite often only fool themselves by not maintaining clean books and records.

Generally, any undisclosed income pales in comparison to what they would get when they sell the business if they handled all transactions legitimately.