Are you inspired to take the leap into business ownership or franchise acquisition but unsure about the financing process? Navigating the requirements for SBA financing can seem daunting at first, but with the right guidance and preparation, you can secure the funding you need to make your entrepreneurial dreams a reality. In this comprehensive guide, I’ll walk you through the necessary documents, processes, and tips for qualifying for SBA 7(a) financing when purchasing a business or franchise. Whether you’re starting a franchise from scratch or buying an existing business, understanding the nuances of SBA financing will give you a significant advantage.
My name is Beau Eckstein, and with over 20 years in the lending industry, I’ve helped countless entrepreneurs successfully finance their business acquisitions. Let’s dive into how you can qualify for SBA financing and what you need to prepare.
Understanding SBA Financing: What Is SBA 7(a) Loan?
The SBA 7(a) loan program is one of the most popular financing options for small business owners seeking to buy or start a business. It offers favorable terms and competitive interest rates, making it an attractive choice for acquiring franchises or existing businesses. The Small Business Administration (SBA) guarantees a portion of the loan, reducing the risk for lenders, and enabling borrowers like you to access financing that might otherwise be difficult to secure.
In terms of financing a business acquisition or franchise, SBA 7(a) loans can cover up to 90% of the purchase price, which significantly lowers your initial capital requirement. This is a powerful tool for entrepreneurs looking to maximize leverage while minimizing out-of-pocket expenses.
Key Documents Required for SBA Financing
Whether you’re acquiring an existing business or starting a franchise, the documentation required by the SBA is quite similar. Preparing these documents in advance will streamline your loan application and improve the chances of approval.
Personal Financial Statement (SBA Form 413)
This form captures your personal financial situation, including assets, liabilities, income, and expenses. Think of it as a snapshot of your financial health and an essential part of your loan application.
Personal Background and Experience (SBA Form 1919)
This form acts like an application, detailing your personal information, business experience, and qualifications. It helps lenders assess your capability to run the business successfully.
Tax Returns
For the last three years, you’ll need to provide your personal tax returns. If you’re buying an existing business, you’ll also need to gather the seller’s tax returns for the same period, plus year-to-date financials.
Bank Statements and Resume
Bank statements verify your cash flow and financial stability, while your resume demonstrates your experience and readiness to operate the business.
Franchise Disclosure Document (FDD)
If you’re purchasing a franchise, this document is critical. It provides detailed information about the franchise, including the number of units, fees, obligations, and financial performance representations. The FDD is required by law and is a key part of your loan package.
Additional Documents for Existing Businesses
When acquiring an existing business, additional documentation such as accounts receivable, inventory lists, and equipment schedules become necessary as you progress—usually after receiving your term sheet from the lender.
Starting a Franchise vs. Buying an Existing Business: What’s Different?
While the SBA loan process remains largely consistent whether you’re starting or buying, there are some key differences to consider:
- Starting a Franchise: You’ll need to provide three years of financial projections. This is because the franchise is a startup operation, and lenders want to see your expected cash flow and profitability.
- Buying an Existing Business: You’ll provide the seller’s tax returns and year-to-date financials. This helps lenders assess the current cash flow and viability of the business.
For franchises, the Franchise Disclosure Document is particularly important as it outlines the franchise’s history, unit count, and any performance benchmarks. Financing is generally easier for well-established franchises with 50 or more units, but franchises with 10 or more units are also considered solid candidates. Smaller franchises or those just starting out with one or two units can still be financed, but it requires more detailed analysis and planning.
On the other hand, existing businesses that are cash-flow positive tend to be easier to finance. Banks are more willing to lend higher amounts when the business demonstrates consistent income, whether it’s a franchise or a non-franchise operation.
Maximizing Your Financing: Up to 90% Loan-to-Value and Seller Carry Back
One of the biggest advantages of SBA 7(a) financing is the ability to secure up to 90% of the purchase price for business acquisitions. This high loan-to-value ratio means you need less upfront capital, making it easier to invest in your business goals.
Additionally, when buying an existing business, you can often negotiate with the seller to carry back a portion of the financing. This means the seller acts as a lender for part of the purchase price, providing you with favorable terms and reducing the amount you need from traditional lenders. This seller carry back option is a powerful tool to bridge financing gaps, and it’s worth exploring during your negotiation.
Combining SBA financing with seller carry back can significantly improve your chances of closing the deal and setting your business up for success.
Why Cash Flow Matters
Cash flow is king when it comes to SBA financing. Lenders want to see that your business generates enough income to cover operating expenses and repay the loan. That’s why buying an existing cash-flowing business often results in better loan terms and higher financing amounts.
Exploring SBA Loan Options: 7(a) vs. 504 Loans
While the SBA 7(a) loan is the most common for business acquisitions, it’s important to know about other SBA financing options like the SBA 504 loan program. Each has its own benefits depending on your business needs:
- SBA 7(a) Loans: Best suited for business acquisitions, startup franchises, working capital, and equipment purchases. Offers flexible terms and can finance up to 90% of the purchase price.
- SBA 504 Loans: Primarily used for real estate and large equipment purchases. Offers long-term, fixed-rate financing and is ideal if you’re buying or building a commercial property for your business.
Understanding these options can help you choose the right financing solution tailored to your specific acquisition or expansion plans.
Final Tips for Preparing Your SBA Financing Application
To improve your chances of SBA financing approval, keep these tips in mind:
- Organize Your Documents Early: Gather personal financial statements, tax returns, bank statements, resumes, and any business-specific documents well before applying.
- Understand the Franchise Disclosure Document: If buying a franchise, study the FDD carefully and work with your lender to build accurate financial projections.
- Focus on Cash Flow: Demonstrate consistent cash flow or prepare realistic projections showing how your business will generate income.
- Consider Seller Financing: Negotiate seller carry back options to reduce your upfront financing needs.
- Consult a Financing Expert: Work with an SBA-approved lender or business ownership coach to navigate the application process smoothly.
By following these steps, you’ll position yourself strongly for SBA financing and be well on your way to owning the business or franchise of your dreams.
Need Help? Book a Discovery Call
If you’re feeling overwhelmed or want personalized guidance, I’m here to help. Whether you’re buying a franchise, an existing business, or starting fresh, I can walk you through the SBA 7(a) and 504 loan processes, explain your financing options, and help you build a winning application.
Feel free to book a call with me to get tailored advice and clarity on your SBA financing journey. Let’s work together to turn your business ownership goals into reality.
Looking forward to helping you succeed!
Beau Eckstein
Business Ownership Coach & SBA Financing Expert