The small business administration, or SBA backs a series of business purchase loans. These loans are devised and guaranteed by the SBA, then offered by banks and other lenders. The SBA offers these loans to help entrepreneurs buy existing small businesses. As a would-be entrepreneur, an SBA loan can provide you with the funds to buy a business even if you struggled to secure other loans. Applying for an SBA loan can be difficult though. Consider the different business banking options available. Here are the steps that will help you acquire an SBA business purchase loan.
Letter Of Intent
The first thing you will need for an SBA loan is a letter of intent. This is document written by the business’ current owner. It should confirm that they wish to sell the business to you and included the agreed price. It also should also outline any other conditions included as part of the sale. This will provide proof to the bank that there is a deal in place, and you intend to use the loan the way you claim you will. Since an SBA loan is built on your intention to buy a business, this letter is essential to securing the loan.
Provide Financial Information
The SBA will need to know all about your financial circumstances and that of the business. You may have heard of this requirement at different business seminars. Prepare information going back three years for both you and the business. You’ll need a personal credit score of at least 680 to secure an SBA loan. Additionally, you’ll need to provide business plans, outlining your plans for the business. These documents are used to prove that you can repay the loan. Be as thorough as you can here to ensure that the bank believes in your vision.
Pay Down Payment And Fees
With your loan assessed and approved, you must now pay a down payment and other fees. Frugal living should be in your future if you’re worried about these fees and the down payment. You will be expected to put down 15 to 30 percent of the loans amount as a down payment. In addition, an SBA loan has a guarantee fee of another 3 percent of the loan amount. This is on top of the other fees that are included in the loan process which you will also have to pay. An SBA loan has much higher fees and interest rates, but this money helps ensure more security for your loan.
Consider Seller Financing
If you are struggling to find the money for the down payment or fees, you might consider seller financing. This is where the seller offers to lend you up to 70% of the purchase price of the loan. You then re-pay them from the profits of the business over time. This option offers you a lot of flexibility, since it is a private agreement between you and the seller. This means it won’t affect other loans you might take. However, seller financing might raise the cost. You will also be responsible for the payments even if the business goes bust. Seller financing can be a great tool to handle fees for an SBA loan and get the process moving.
If you wish to pursue an SBA loan, start as soon as possible. You should assume getting an SBA loan approved may take as long as 90 days longer then a standard loan. This is because the SBA loan has a longer assessment period than other loans. You can help speed up this process by having all the information ready to go before you apply. Preparation is the best way to cope with these necessary delays. Start soon and be ready when applying.
Securing an SBA loan can be straight forward when you focus on a few basic steps. Get the seller to write a letter of intent. Provide the bank with honest and detailed financial information to insure their risk. Pay the 20% down payment and all the related fees. If these upfront costs are daunting, consider seller financing to fill in the gaps. Start soon since the process will take longer then a normal loan. With these steps, you will be fast on your way to buying a small business.