How An SBA Loan Is Applied For and Obtained

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Once you have found the business of your dreams, you need to figure out a way to purchase it. One way is if you have the proverbial “rich Uncle” who can write a check for the entire purchase amount. The probability of this happening is less than 1%. Or you can go to your parents, siblings or other relatives. The probability of this happening is less than 5%. Perhaps your friendly banker will make you a conventional loan. The probability of this happening is less than 10%.

How then do you improve your chances of getting the money you will need to buy the business in question? Well, if you are like most first time buyers, you will need a SBA loan to buy the business. And if this is your first time down the SBA path, the process is somewhat overwhelming and time consuming. Also, you need to understand that the SBA does not make loans. They insure loans. The SBA Preferred Lender makes the actual loan.

1. Step one is to obtain the 2 most recent tax returns for the business. So if we are in August of 2015, you will need to obtain the 2014 and 2013 tax returns for the business. The SBA Preferred Lender will apply a formula to a calculated figure called Owner’s Discretionary Cash Flow also known as Seller’s Discretionary Earnings. This figure starts with Net Taxable Income from the Tax Return or Net Income (or loss) from the Income Statement and then certain line items are “added back.” The items that are added back include owner’s compensation and perks, depreciation and amortization because they are non-cash items, one-time non-recurring items, interest because it is different for each owner, etc.

2. When the preceding number is determined, the SBA Preferred Lender will apply a formula where they take the anticipated debt service (principal plus interest) and multiple it by 120 percent. They want to make sure that the business can pay back the loan without going into default. They are less concerned with the borrower’s credit score than they are concerned with the company’s ability to pay its bills.

3. Once the SBA preferred lender knows that the business can pay back the loan, they then start making you jump through additional hoops. You will need to complete a very long application that can run 30 pages in length. You will need to draw up a business plan that includes assumptions and strategies.

4. The SBA preferred lender will require that a 3rd party business valuation is performed. They will also require that you obtain term life insurance for the term of the loan. Most SBA loans for businesses sold without real estate have 10 year maturities. If real estate is included, the term can be more than 20 years or less than 20 years.

5. The loan process can take from 4 to 6 weeks if everything goes smoothly. If complications arise, it can take longer.

The preceding steps constitute a crash course in applying for and obtaining a SBA loan.

  • Author: Loren Marc Schmerler
  • Title: Broker - Owner
  • Company: Bottom Line Management, Inc.
  • Company Website:
  • Date: April 14, 2016
  • Category: Buying a Franchise or Business
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