The U.S. Small Business Administration (SBA), is a government agency that offers support to small businesses through contracting, counseling and capital.
SBA loans have a reputation for being hard to access, for good reason. SBA loans can be particularly tricky to secure if you’re using that capital to acquire a business. If you’ve never gone through the SBA financing process before, it can be confusing. Heck — it can be confusing even if you have gone through the process before.
To ease the pain, here are five tips for navigating the complex process of gaining SBA financing for a business acquisition:
1. Shop around for the right bank.
While you may want to secure an SBA loan from your current bank, limiting your options may lower your chances of success. For your reference, the SBA website has a list of the 100 most active SBA lenders. See who is in your area and go talk to them.
When you do, here are some good questions to ask:
- How many SBA deals has the bank done in the past two years?
- How many SBA deals has the loan officer done in the past two years?
- What was the average size of those SBA deals?
- Did the loan include real estate? (This will help you know how they expect to collateralize the deal)
2. Understand the distinction between PLP vs CLP.
There are two main SBA programs that banks can be a part of: Preferred Lenders Program (PLP) or Certified Lenders Program (CLP). Knowing the distinctions between each program can help you understand what type of lender is right for you.
- Preferred Lenders Program:. A PLP bank reviews and approves its loans without SBA intervention. The SBA doesn’t need to approve these loans, meaning you’ll only have to go through the bank (instead of the bank and a random SBA reviewer.) This makes for a faster process.
- Certified Lenders Program: CLP banks are best for complex initiatives or deals that the bank doesn’t want to accept full liability for because of some obscure issue or request. CLP banks will have to pass off the loan to the SBA for the final decision to receive the government guarantee, so it could take a bit longer to get approved than with PLP banks.
The CLP process can be advantageous for really esoteric deals, but otherwise it’s best to use a PLP lender for speed and ease of communication.
3. Expect to provide a personal guarantee.
If you are going to hold 20% or more of the company’s equity, the SBA requires a personal guarantee. If you default on the loan, your personal assets are on the line. Because of this risk, most SBA loans are refinanced within three to four years. You usually only have prepayment penalties of no more than 3% for the first three years of the loan, so refinancing at four years carries no additional fees. And don’t try to be clever here — ten people each holding 10% equity doesn’t mean you’ve sneaked past this. Someone always has to guarantee the loan.
4. Experience matters.
The bank and the SBA will take your management team’s experience as well as the business’ experience in the industry into account when evaluating your loan. A lack of direct experience in the industry doesn’t mean you won’t qualify for a loan, but it will likely require you to explain more about your qualifications.
It’s also key that you have an attorney some experience in SBA loans on your side, if possible. That said, your loan officer will be the biggest determinant of success (See Tip #1).
5. Be prepared.
Remember: Banks want to see concrete plans for the deal you want to do. Don’t expect them to help you craft the deal structure from thin air. Go to them when you have a good idea of your proposed deal structure and then ask them to respond. Have the following:
- Letter of Intent
- Three years of tax returns and financials (plus any year to date information)
- Your personal financial statement
- A chart of your desired financing sources and uses
Getting an SBA loan for a business acquisition is far from impossible- it just requires some front-end homework. Thankfully, there are a lot of teachers around you. Seek out SBA lenders at banks you trust, or find a friend that has secured SBA financing, or research advisors who have experience putting SBA deals together. Bring these tips to conversations with those experts and you’re well on your way.