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 Business Acquisition Loans


Many people would rather purchase an existing business or franchise rather than starting one from scratch. For many this is a great idea, and you can make an application to the SBA for financial assistance. The Basic rule of thumb to remember is that there is no lending institution including the SBA that will generally finance 100% of the purchase price. The SBA will require the applicant to make a cash injection between 25%-33% of the total business plan. The balance of the funds required can be in the form of a SBA loan. Keep in mind that the SBA loan can only be used to finance tangible assets. Some examples are; purchase of inventory, furniture and fixtures, machinery and equipment, accounts receivable, and to make leasehold improvements. Loan Proceeds cannot be used to finance the owner's goodwill. The applicant should also have good credit and a basic understanding of the business they wish to purchase.


SBA loan funds can be used to purchase a business in a number of different ways. Funds can be requested to purchase the entire business, only the assets of an existing business, or purchase the stock of a corporation. Please keep in mind that loan proceeds can only be utilized to purchase the "hard assets" of the business you plan to buy. When a business is in the form of a partnership, one partner can request funds to buy out the other, as long as the surviving partner will own 100% of the company.


The Following Are Guidelines When Utilizing SBA Proceeds To Finance The Purchase.


  • The applicant should have good, clean credit.
  • The applicants must make a cash injection into the transaction of at least 25% of the purchase price of the business.
  • SBA funds cannot finance the purchase of an intangible asset, such as goodwill. This is normally covered by the buyer's cash injection to the project.
  • The business to be acquired must be profitable and should have sufficient historical cash flow to support the new debt. The following is a good example. Take last year's net profit of the business and add back in depreciation, interest, owners salary and any other extraordinary expenses. Then deduct all forward loan payments including the new SBA loan. If there is positive cash flow, then more than likely you are making a good choice, and there is an excellent chance of securing SBA financing.
  • The buyer should have management experience in the line of business being acquired. Franchises are excluded from this requirement since the new owner will be trained by the franchiser.
  • If the business is a retail operation the SBA would like to see the existing term of the lease and any options to extend be equal to or longer than the term of the loan being requested.
On a business loan request, or purchasing an approved franchise with a strong historical cash flow present, there is a good posibility that:
  1. In some cases, loans can be funded with as little as a 10% - 15% down payment from the applicant.
  2. In some cases the goodwill can be financed in the loan request.
  3. In some cases loans can be funded with limited personal collateral.

Repayment Terms:

Generally, the maximum length of repayment of the loan cannot exceed 10 years. If the purchase of the business includes Real Property, then the term of the loan will be longer. The loan will become a blended term somewhere between 10 and 25 years.


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