Overcoming SBA Financing Limitations & Revolutionizing Acquisition Financing
The Small Business Administration (SBA) loan program is often a go-to option for entrepreneurs looking to finance business acquisitions. However, there are significant deficiencies in the SBA process that cause many deals to fall through. In fact, studies have shown that only slightly more than half (52%) of SBA loans are actually approved and funded. This failure rate presents a huge problem for both buyers and sellers, particularly when significant time, energy and financial resources have been invested into the process.
While SBA loans have their place (and were primarily designed for brick-and-mortar businesses with physical assets and specific financial reporting), they often are ill-suited for online and service-based businesses. To address this, conversations with private equity (PE) lenders, debt funds and capital groups began. These capital groups often have established executive relationships with tier-1 and tier-2 banks due to the significant volume of conventional lending they do. And as a result, they are well-positioned to secure conventional loans for business acquisitions, provided both the buyer and the business meet certain criteria.
Buyers must have a strong credit profile and the financials of the target acquisition must also meet conventional lending standards. To qualify for these loans, a target business must demonstrate a solid 3+ years of financial history, stability, no major losses and no excessive add-backs or personal misuse of business funds. This creates a need for a thorough pre-underwriting process to ensure that only “bankable” deals are presented to lenders.
Through this process, we are able to provide our clients with the benefit of conventional loans, which come with similar (or often better) rates & terms, fewer restrictions and quicker closing timelines compared to SBA loans. Conventional loans also offer greater flexibility, such as the ability to purchase majority positions in a business, and the option to finance either asset-based or stock-based acquisitions. Additionally, by working with capital groups and other creative lenders, we can ensure that deals are structured in a way that maximizes the likelihood of approval, often making conventional financing the best choice for many entrepreneurs looking to acquire businesses.
In summary, by streamlining the financing process and leveraging relationships with capital groups, lenders, debt funds and underwriters, we can help buyers secure better, more business-friendly loan terms that are quicker to close, offer fewer restrictions, and ensure overall smoother transactions.