When it comes to financing a business acquisition, choosing the right loan can make a huge difference in your long-term financial health. One of the most popular financing options is the SBA 7(a) loan. However, there’s a major distinction to consider when acquiring a business: Will real estate be part of the deal, or will the acquisition involve no collateral?

Understanding these differences is crucial as they can significantly impact the terms of your loan, including the length of amortization, prepayment penalties, and overall financing structure. In this post, we will dive deep into the differences between an SBA 7(a) business acquisition with real estate and one without.

Real Estate Involvement: A Key Differentiator

The primary factor that differentiates SBA 7(a) loans for business acquisitions is whether real estate is involved. If real estate makes up more than 51% of the acquisition cost, this can work in your favor, particularly when it comes to the loan's amortization period.

Longer Amortization with Real Estate

For business acquisitions involving real estate, you can potentially stretch the loan out over 25 years. This longer amortization period can lower your monthly debt payments, making the deal more financially manageable. In contrast, a business acquisition without real estate typically comes with a 10-year term. The longer the amortization, the lower your monthly payments, but it also locks you into a loan for a more extended period.

Prepayment Penalties

It’s important to note that any SBA 7(a) loan with an amortization period over 15 years comes with a declining prepayment penalty. For the first year, this prepayment penalty is 5%. In the second year, it drops to 3%, and by the third year, it reduces to 1%. After three years, there’s no prepayment penalty at all. This is something to consider if you think you might want to pay off your loan early.

Lenders May Structure Two Separate Loans

Another significant trend in the world of SBA 7(a) loans is how lenders structure loans for business acquisitions involving real estate. Many lenders will now separate the loans into two distinct notes: one for the business and one for the real estate.

• The business loan typically carries a shorter amortization period, while the real estate loan is stretched out over 25 years.
• This blended structure allows you to take advantage of longer terms on the real estate portion while keeping the business financing flexible.

In some cases, if the acquisition is larger and has a more complex structure, some buyers choose to finance the real estate portion with a 504 loan while using an SBA 7(a) loan for the business itself. The SBA 504 loan often comes with better interest rates but also includes a longer prepayment penalty, so it’s important to consider your plans for the business when making this decision.

Structuring Your Purchase and Sale Agreement

When acquiring a business that involves real estate, you’ll need to carefully structure the purchase and sale agreement. It’s vital to allocate the purchase price between the real estate and the business appropriately. Most lenders prefer that the bulk of the purchase price be assigned to real estate, as it allows for a longer amortization period and lower monthly payments.

However, this isn’t purely about what the lender wants. Often, the seller’s CPA will have preferences for how the deal is structured due to tax implications. Working together to create a win-win scenario for both parties is essential.

Environmental Assessments and Appraisals

Whenever you are purchasing real estate with SBA financing, there are additional requirements that need to be met. The lender will conduct appraisals and a Phase 1 environmental assessment.

The Phase 1 environmental assessment involves investigating the property’s history to ensure there are no environmental hazards, such as contamination, that could cause significant financial liabilities down the road. This is a critical step in protecting yourself from unforeseen expenses related to environmental cleanup.

While these assessments may seem like an extra hurdle, they’re there to protect you. Imagine acquiring a property only to find that it needs hundreds of thousands of dollars in remediation due to environmental issues – it becomes your problem once the deal is finalized. The assessment ensures that you’re aware of any potential issues before making the purchase.

Conclusion: Choosing the Right Structure for Your SBA 7(a) Loan

When navigating an SBA 7(a) business acquisition loan, whether or not real estate is involved plays a significant role in how the loan is structured. Real estate allows for longer amortization and lower monthly payments, but it also involves environmental assessments and appraisals.

If you’re unsure which option is best for your specific acquisition, it’s crucial to discuss your scenario with a knowledgeable professional who can help you structure the deal appropriately. Whether you opt for a 7(a) loan with or without real estate, understanding the intricacies of each option will empower you to make the best decision for your business's future.