The Financing Advantage: SBA Loans for Business Buyers

Each year, thousands of would-be small business owners dip their toes in the business-for-sale marketplace, yet fail to close the deal because they can't secure adequate financing. SBA loans can be the missing ingredient for many aspiring buyers – if they know how to navigate the approval process.

The decision to buy a business is a major milestone in an entrepreneur's life. There is honestly nothing more exciting than the nervous anticipation of becoming a business owner for the very first time.

Today's business marketplace is rife with resources to help buyers locate the perfect business opportunity. For example, resources like's online marketplace offer an endless supply of business listings as well as other tools to assist buyers with the selection process.

But for a lot of business buyers, the entrepreneurial dream takes on a nightmarish hue when they discover lenders aren't lining up to fund the purchase. Everyone knows it takes money to make money, but shouldn't it be easier for the little guy to get his foot in the door?

That's where the Small Business Administration (SBA) comes in. Congress created the SBA in the 1950's with the mission to "aid, counsel, assist and protect . . . the interests of small business concerns." In other words, the SBA exists solely to promote small businesses and help small business owners do business more effectively.

A big part of the SBA's job is to help new business owners get into the game. One of the ways they accomplish this is to offer SBA loans to hopeful entrepreneurs. New borrowers needs to understand that the term "SBA loan" is a bit of a misnomer since the SBA doesn't provide loans directly to business owners, but instead guarantees loans provided by other lenders.

A SBA loan can be used for a variety of purposes including the acquisition of materials, property, or equipment of an existing business. Although the SBA's guarantee is a powerful incentive, SBA lenders don't take the approval process lightly. Buyers still have to adhere to an assortment of criteria if they hope to get a green light.

Financial Requirements

Right off the bat, a SBA lender wants to make sure the borrower meets certain financial requirements. If the borrower's credit rating is less than stellar, there are a couple of options. First, the borrower can review his credit report and work with previous lenders to remove items that have a detrimental effect on his overall score. Although lenders are generally willing to work with borrowers to clear their report and improve their rating, the borrower will probably have to make some progress before the report will improve enough to make a difference.

Another option is for the borrower to simply delay the purchase until he can demonstrate a trend of positive borrowing. This could take a little while, but if it makes the difference between getting a loan and not getting a loan, the time will be well-spent.

Yet even the most immaculate credit rating won't be able to help a borrower who isn't able to come up with the minimum downpayment. SBA loans typically require a downpayment in the 10% to 30% range, depending on the type of collateral the borrower is able to offer as security for the loan. Since an adequate downpayment can represent a big chunk of change in a business purchase, it's not uncommon for buyers to beg, borrow, and steal (okay, maybe not steal) it from the equity in their homes, their retirement programs, or even relatives.

Skills and Experience

People frequently turn to business ownership as an avenue for a mid-life career change. A career change is a perfectly legitimate reason for buying a business, but SBA lenders are concerned that borrowers have the skills and experience they'll need to make the business successful.

Ideally, lenders are looking for buyers who have previous ownership experience and a track record in the industry. This requirement drives first-time business owners crazy because the only way for them to gain ownership experience is to actually own a business – which is exactly why they are applying for the loan in the first place.

Fortunately, most SBA lenders sympathize with the dilemma facing first-time business owners. Borrowers can plead their case by identifying management experience in a previous career and by demonstrating firsthand involvement with the kinds of responsibilities owners face on a daily basis.

Experience in sales, marketing, accounting, and planning can make a positive impression, as well as experience in a related industry. SBA lenders also look favorably on the willingness of the current owner to take the new owner under his wing and teach him the ropes for a period of time.

Projections and Planning

SBA lenders usually require their borrowers to create a business plan describing their goals and game plan for the company. Buyers occasionally bristle at this requirement, but in truth there's no reason why a lender should have to force a borrower to put their plan in writing. If the buyer isn't capable of producing a coherently written business plan, he probably isn't capable of leading the company.

The length and detail of the business plan can vary, according to specific lender requirements. But on some level, it must address the company's past performance, its current condition, and the buyer's projections for the first one to three years under new ownership. The projections should also include a realistic forecast of how the borrower will repay the loan, cover expenses, and eke out a living during the critical first year.


To help the buying process go a little more smoothly, SBA lenders offer a pre-approval option for prospective borrowers. Pre-approval is a great tool for buyers because it takes guesswork out of the equation by establishing firm boundaries around the purchasing decision.

Buyers should go out of their way to take advantage of this option because it could have significant ramifications during negotiations. Sellers take pre-approved more seriously and are more open to concessions when they know the buyer has the ability to bring the transaction to completion.

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