When many buyers look to purchase a business, they know the basics of SBA financing, lower down payments, longer terms, etc. However, what doesn’t get discussed in depth as often are the additional benefits of SBA financing relative to other financing opportunities. These are often equally as important as the more transparent numbers.
Seller Credibility
What does an SBA loan mean to a seller? This is interesting. An SBA offer is pre-qualified, meaning the buyer’s gone through hoops to get approved. SBA approval involves credit checks, assessments of business experience, financial ability, etc. When the offer is on the table, it has substance.
Alternatively, those pursuing more creative financing or those who say, “we’ll figure it out later,” do not have a great chance at following through. Sellers have seen those deals fall apart too many times. An SBA pre-approval means a vetted buyer is serious about the purchase and associated terms. This could be the difference between being considered first and watching another buyer walk out with the enterprise.
For those exploring options in buying-and-selling-a-business, understanding how lenders view these transactions changes the entire approach. The right financing structure doesn’t just make the purchase possible, it makes the deal more attractive to sellers who want certainty.
Cash Flow Protection No One Talks About
SBA payments stretch 10 years typically for business acquisitions, which means monthly payments are less (which is a benefit), but there’s enough cash left in the business during that critical early stage for when expected expenses arise.
A new owner often assumes responsibility for things they didn’t see during due diligence. Equipment falls into disrepair. Employees leave unexpectedly. Major clients are renegotiating business terms. Having $1,000-$2,000 per month more due to a longer term literally saves businesses when hard times fall on everyone.
If one goes to a bank to request a business loan, they’ll likely get 5 years max to pay back the loan. What’s the difference in monthly payment on a $300,000 purchase from a 5 year and 10-year term? Approximately $2,500. That’s $2,500 that can go back into working capital at the purchase.
The Working Capital Factor
Many buyers overlook working capital, they focus solely on purchase price. However, without post-closing working capital needs, there is no point in buying a business at all. SBA loans can factor working capital into their loan qualifications. Yet many buyers don’t realize this option exists.
Most companies require working capital reserves. Payroll doesn’t stop while waiting for receivables. Inventory does not magically refill without cash in hand. The enterprise operates regardless of retained funds. Thus, having working capital not immediately drained from personal savings upon purchase is critical.
Negotiating Leverage Like No Other
An intangible benefit exists when buyers with SBA offer loans enter negotiations with sellers; essentially, they bring in powerful institutional backing. This isn’t someone attempting to piece together funding from various avenues, this is someone who knows business and secured the loans offering good value.
Such confidence elevates conversations; sellers feel more confident negotiating prices based upon due diligence findings and are less likely to punch holes in terms because they see a qualified buyer for what they are. Negotiations change for the better.
The Due Diligence Supplement
SBA lenders do their own due diligence, they lend money based on personal qualifications and qualifications of the business at stake. They go through tax returns, appraisals, financial statements, and more, and often catch red flags.
Buyers get an extra layer of protection from this process. Yes, smart buyers do their own due diligence, but the lender’s independent analysis that the business makes sense provides confirmation, and sometimes lenders catch things buyers don’t; this perspective saves money.
Asset Coverage Without Asset Liquidation
Usually, traditional business loans utilize personal assets as collateral, homes, stock options, whatever buyers have to their names must be put up on the line. While SBA loans still require personal guarantees from buyers, this works differently concerning assets, as many business assets serve as collateral as well.
This means that buyers do not have their lives on the line from day one.
This is more important than buyers realize, not having to worry that if a quarter runs poorly and they’re not producing a salary that they’re also going to lose their house has value. There needs to be an investment, but it shouldn’t be so personal that it reduces daytime operations enjoyment.
The Bigger Picture of Value
Ultimately, it’s not about financing better than others, it’s about (realistically) more than interest rates and slightly better terms, it makes sense with institutional backing for improved seller perception post-purchase, better cash flow maintenance, blended working capital opportunities, greater negotiating status, independent validation, and asset requirements that aren’t personal.
For buyers who only focus on down payment percentages miss the greater value opportunity. It’s not how much of a business can I afford, it’s how much of a business I can afford through financing that sets me up for success later.
Lynn Martelli is an editor at Readability. She received her MFA in Creative Writing from Antioch University and has worked as an editor for over 10 years. Lynn has edited a wide variety of books, including fiction, non-fiction, memoirs, and more. In her free time, Lynn enjoys reading, writing, and spending time with her family and friends.
