Five Things to Know About SBA Financing When Buying or Selling a Business

SBA loans
Business planning
Written by: Walter McLaughlin, SVP and SBA Manager
Person smiling with tablet in hand and plants in background

If you’re looking to buy or sell a business, it’s worth considering if your change-of-business transaction qualifies for a Small Business Administration (SBA) loan. With SBA financing, the bank provides a long-term loan at reasonable rates and fees and the SBA guarantees it—typically up to 75 percent of the loan. 

Why that matters: Compared to financing equipment or buildings—items that can be assessed in terms of actual dollars and how they will be used by the borrower—financing the purchase of a business is complicated. Most change-of-ownership transactions require many considerations: industry trends, the prospective owner’s experience, the business location, and the potential impact of changing consumer tastes, technology and competition, to name a few.

These transactions also tend to involve the transfer of a large amount of intangible assets (goodwill) to the buyer, adding an element of uncertainty and a likely collateral shortfall. That’s where the SBA’s government guaranty comes in, mitigating the risk and making the loan more viable.

SBA financing offers other benefits, too. In many cases, working capital, equipment purchases and other uses of proceeds may be included in the loan. There’s no balloon payment, freeing the buyer from expending extra resources later. Plus, the SBA loan’s longer amortization—usually up to 10 years—helps with cash flow. Read Five Tips When Considering an SBA Loan for additional information.

Here are five things to know when considering SBA financing for a change of ownership:

1. An SBA loan may be used to fully or partially buy into a business

One owner can buy out another, a new buyer can purchase an entire company, and an existing business can even use an SBA loan to purchase another company. Additionally, as of May 2023, the SBA allows partial business purchases.

2. The buyer needs a business valuation

If $250,000 or less is being financed and there isn't a close relationship between the buyer and seller, the bank can perform an internal valuation. Above that, an outside appraisal is required at the buyer’s expense. Most business valuations take a couple of weeks to complete and cost $1,500-$2,500, depending on the company’s revenue, location, industry and other key factors.

3. An SBA loan can finance up to 90 percent of the purchase price

This helps ensure the buyer is invested in, and committed to, the project.

4. The seller can carry part of the loan

If the seller is willing to carry a portion of the financing, the advantages may include favorable terms, a lower cash down payment for the buyer and potential tax savings for the seller.

5. The seller must exit (except in partial purchases), but may consult

The SBA allows the seller to enter into a consulting agreement for up to one year.

As you consider this important transaction, you should always work with an SBA-Preferred Lender. Preferred Lenders have proven experience processing SBA loans, understand the nuances of this type of financing and can guide you through the transaction. Banner is proud to be recognized as an SBA-Preferred Lender.