If you’ve ever thought about running a business, chances are you’ve considered purchasing an existing business. Buying an established business provides the advantage of starting with a proven product or service, an established customer base, and reliable cash flow. Additionally, if you are looking to purchase a small business, you have the ability to secure some of the most favorable financing solutions out there. Finally, right now may be the ideal time to buy the right business. Valuations may be lower given uncertainty and sellers may be more anxious to sell with Baby Boomers increasingly needing to liquidate the wealth they have wrapped up in their businesses. A large supply of businesses for sale, favorable financing, and favorable valuations may make this the ideal time to buy a small, stable business.

If you’re considering purchasing a small business, one of the best ways to finance the purchase is through an SBA 7(a) loan. SBA loans are small business loans issued by participating lenders and guaranteed by the U.S. Small Business Administration, a government agency that provides support to America’s small businesses. Because these loans are guaranteed by a federal agency, lenders are willing to offer flexible terms and low interest rates. SBA 7(a) loans can provide capital of up to $5 million and can serve a variety of purposes. In addition to using the loan to purchase a small business, SBA 7(a) loans can be used for working capital, equipment, refinancing debt, and purchasing real estate.

While the eligibility criteria for the 7(a) program are the broadest for all the SBA loan programs, it can still be difficult to get approved. For a small business buyer, eligibility requirements specify that:

  • the business must be for-profit
  • the business must be in the U.S.
  • the buyer must provide an equity injection (typically 10% of the loan amount)
  • the buyer must not be able to get a comparable loan from a bank on reasonable terms
  • the business must not be over the SBA size limit for its particular industry (typically based on number of employees and financial history)

With the right approach, anyone whose situation meets these requirements can acquire an SBA 7(a) loan. If the business is doing well, and your personal finances are in good shape, the chances of being approved for an SBA loan are substantially higher.

To begin, go to the SBA website and begin gathering documents based on the loan application checklist. Some of the items required are:

  • SBA’s borrower information form
  • Statement of personal history
  • Personal financial statement
  • Personal income tax returns (previous three years)
  • Business tax returns (previous three years)
  • Business certificate or license
  • Business lease
  • Loan application history

To aid buyers in finding the right lender, the SBA’s website offers a free online referral tool that connects small businesses with participating SBA-approved lenders. Banks follow SBA guidelines but use their own underwriting criteria to evaluate loan applications. As part of the underwriting process, if the amount being financed less the appraised value of real estate and/or equipment is greater than $250,000 or if there is a close relationship between the buyer and seller, the lender must obtain an independent business valuation.

For anyone interested in buying a small business, an SBA 7(a) loan is definitely something to consider.