Financing Options for Business Buyers in Pittsburgh
There are various financing options available for buyers.
Availability and requirements of obtaining conventional financing varies based on a lot of factors:
– the type and size of business
– the value and type of assets
– the buyer’s background and financial position
– the buyer’s relationship with the bank
– the history of the business
– the industry
– the competitive banking environment and macro-economic environment
– the customer concentration of the business
– the specifics of the management team
There is no rule of thumb on conventional financing. Smaller businesses will require higher collateral coverage than larger businesses. Loans based on cash flow, with an airball, typically only apply to businesses with higher EBITDA (in the $Millions). Expect a Personal Guarantee (PG) on all but larger companies. It is best to have an extended conversation with business bankers from at least two to three lenders as each bank has their own sweet spots.
Government Backed Financing (SBA 7(a), USDA)
For smaller companies with a transaction size generally under $5 Million, the most common loans are made with the US Small Business Administration (SBA). The SBA enables banks to make loans to buyers they ordinarily would not make by guaranteeing close to 90% of the loan proceeds. Only individuals can get SBA loans. SBA financing is the critical vehicle through which small business acquisitions are financed. The two loan types most commonly used are the 7(a) and 504 loans.
The 7(a) loan is the most commonly used type of SBA loan for individuals buying small businesses. Proceeds from a 7(a) loan can be used for purchasing a business, debt refinance, business expansions, equipment and working capital. The term of a 7(a) loan runs from seven to ten years. Interest rates are typically variable and are based on a spread (2% to 2 ¾%) over the Prime Rate.
The 504 loan program is intended for real estate and fixed assets. 504 loans are unique in that they provide for lower down payments (as low as 10%) with favorable terms including maturities up to 25 years and attractive interest rates which can be fixed for the life of the loan.
The SBA Process
It can be advantageous to work with an SBA lender that is a “Preferred Lender”, who has the ability to originate, process, and close SBA loans much quicker than their non-Preferred Lenders who do not maintain a Preferred designation. Qualifying for an SBA loan is easier than most people expect as long as your lender is experienced in SBA loans. Information your lender will need to review a loan varies from transaction to transaction; however, the typical information needed for a submission are:
- Business Tax Returns for the last 3 years (and financial statements if available)
- Year-to-Date Income Statement and most recent Balance Sheet
- Borrower’s Personal Financial Statement (SBA Form 413)
- Credit Check on the guarantors of the loan (anyone with 20% ownership or more will need to guarantee the loan)
- Borrower’s Resume
- Complete Business Plan
- Asset List
You’ll typically get a response from the bank in about a week. If you received a financing proposal, it will outline the additional documents required to secure the loan.
A few key items banks look for on SBA loans are:
- Cash Flow means Everything: Business acquisition loans are evaluated based on historical and current cash flow reported on the tax returns of the business. The bank will also evaluate your personal financial situation to determine your obligations and how much money they believe you need from the business to fulfill those obligations.
- Experience is Important: The bank is loaning you money, not the business. Your perceived ability to run the business will be assessed. Don’t take this item too lightly.
- Create a Business Plan: A business plan is required. Writing a business plan will force you to learn a lot about the business, determine what you believe needs done differently in the future, and what new initiatives you will implement in the business. You will ask a lot of questions of the owner but once you own the business you may not have time to think about the big picture. A well written business plan will prove to the bank and owner (and yourself) that you understand the business, the competitive environment, employees, products, etc. and are in a position to take over as the leader of the business.
How much money do I need to buy a business?
There is no exact amount. How much money you will need as a down payment depends on the assets of the business, your personal financial situation, and the specifics in your business plan. At a minimum, be prepared to be able to put down at least 20% of the price of the business but, in many cases, the amount can be 30% or even higher.