Interested in starting up a small business? If so, you don’t always need to start from the ground up. Instead, you may want to buy a business that’s currently up for sale. Luckily, there are going to be more opportunities to buy them in the future.
For instance, there are many boomer-aged business owners looking to retire and cash in. On the other hand, you have entrepreneurs who are rattled about inflation and recession that are expected to put their companies up for sale.
That’s great if you are thinking about owning a new business. However, it raises the question: How do you get the funds to buy one of them?
This video answers this question and lets business owners know where to get a loan to buy a business.
One excellent option, Chris Hurn, Founder/CEO of Fountainhead Commercial Capital, tells us, is a loan backed by the US Small Business Administration.
In this latest episode of SmallBiz in: 15, Chris Hurn sits down with Shawn Hessinger, the Executive Editor for Small Business Trends to discuss this topic in depth.
Other key points Chris Hurn discusses in the video are where to go to get the steps small business owners can take if they’ve found a business they want to acquire and want to finance through the Small Business Administration. His takes include the requirements you’ll need to meet and the documents you’ll need to put together to qualify.
If you are someone interested in finding out how to buy a business, you won’t want to miss Using SBA Loans to Buy a Business.
Meanwhile, you can talk to Chris Hurn at https://www.fountainheadcc.com/ if you need more information after watching this episode.
Can I Get an SBA Loan to Buy a Business?
Can you get an SBA loan to buy an existing business? Turns out you can, according to Fountainhead Commercial Capital Founder, Chris Hurn, Read on to see the interview excerpts from his interview with Small Business Trends and find out how.
Shawn: What are the advantages of using an SBA-backed loan to acquire a business?
Chris: Typically, small business borrowers utilize SBA loan programs because the down payment or equity injection is often half to a third of what an ordinary conventional bank loan would require. So that’s a huge advantage, particularly coming out of the pandemic when people realize how precious their capital is.
“The second big reason people like SBA loans is because they usually have much longer terms to repay the loans compared to ordinary, conventional banks.
So it’s not uncommon to have a 25-year amortization, for instance, on a commercial real estate transaction with an SBA loan, whereas most banks are likely going to be more like a 15 or 20-year amortization—quite frankly, probably have a balloon payment after 5, 7, 10 years, where you don’t have that in the SBA world.
Those are probably the two biggest advantages,” Chris says. You also have the ability to utilize the loan proceeds in a much broader fashion than what is often available for a business loan from a conventional lender.
What I mean by that, in particular, is that an SBA 7A Loan can be used, not just for other occupied commercial real estate purchases, refinances, renovation, and construction, but also for business acquisition loans…which are almost impossible to get from an ordinary conventional bank or non-SBA.
We also use SBA 7A proceeds for partner buyout loans; we use them for working capital purposes, a lot of franchise financing is done with SBA 7A loans, lease/hold improvements, renovations are made with 7As, equipment financing—we do a lot of business debt refinancing with 7As. So it’s just a very versatile loan product and tends to be much, much more flexible and versatile than just ordinary, conventional banks.
Those are the big reasons people like to use SBA loans.”
Shawn: What exactly is an SBA bank loan, and how does it differ from other kinds of loans?
Chris: Fundamentally, the SBA has been around since the early 50s. In fact, I think in July it celebrates its 69-year anniversary. And it is the only division of the federal government that’s focused on entrepreneurship; the growth of small businesses in America. This is a big deal since almost half of the employment in America is done through these firms
“So in terms of what SBA is meant to do…the SBA is not a lender…and I get this question a lot, people don’t necessarily realize this, they just assume SBA is the one funding all these loans. They’re not.
The SBA actually is meant to be a backstop for private-sector lenders, they effectively provide effectively insurance…it’s what is called a government guarantee.
So on a typical SBA 7A loan, which is what we are talking about, we have a federal government guarantee of anywhere from 75% to 85% of the loan amount, depending on the size of the loan and whatnot.
And so the reason that it exists is it’s meant to incentivize lenders like ourselves to give more favorable terms. To make a loan that maybe would be on the margin that we wouldn’t necessarily want to make conventionally, for instance.
I’m not suggesting we make bad loans; the SBA is certainly not trying to encourage lenders to make poor credit decisions. But they do want to help nudge lenders over the line if something is kind of in the gray area a little bit.
And, frankly, when we are able to do longer terms it helps the business owner lower their monthly out rates and keeps their cash flow as positive as possible when they have a longer term to repay it. The same with having a much lower down payment.”
Why it’s Never Been a Better Time to Use an SBA Loan to Buy a Business
Shawn: Talking about this, using SBA back loans for acquisitions, what’s the particular relevance right now for this topic?
Chris: If we’re talking business acquisitions, as opposed to just commercial real estate acquisitions, then the reason it’s much more of a relevant topic these days is that you have a tremendous amount of business owners that are retiring, reaching retirement age.
“You know, there was a statistic I saw about a year ago that 56% of all small to mid-size companies in America are owned by baby boomers. It’s no secret that there are like 9,000 baby boomers retiring every single day for the next nine years.
So there’s going to be a boom in business acquisition opportunities because most business owners don’t want to just simply shut the business down and get nothing for it. They’d much rather sell the business if that’s a possibility.
And, frankly, most of these folks don’t really want to hold the paper and don’t want to do seller financing. They’d rather have somebody come in and pay them cash or, you know, somebody who gets financing…effectively pays in cash through financing.
So that’s something that you’re going to see much more of going forward. Times like what we’ve just been through with the pandemic, I think that accelerated some people’s desire to exit a little faster, perhaps. The same thing with right now going through an inflationary period of time. I think you’re going to see more and more sellers want to move on.”
Shawn: You mentioned inflation. And I was wondering if inflation, coupled with the concerns that we’re hearing now in the press about a possible recession, might also be accelerating the interest of people to sort of cash out to get what they can from their business and move on.
Chris: That’s exactly what I was referring to there. It definitely happens more in times like these. Also, the downside that we were talking about a few minutes ago, why some banks don’t want to or a lot of conventional banks don’t like to participate in some of these, is partly because of the macroeconomic environment we find ourselves in.
“When inflation has been rising, as it has been over the last year or so, that obviously puts some doubt in a lender’s mind about the repayment ability of that borrower. You know, as their costs are increasing across the board, whether it’s labor costs or inventory costs or, you know, just a variety of different things, shipping costs.
And then, of course, in order to tamp down inflation, oftentimes one of the best tools is or the Fed to raise their short-term borrowing rates, which then trickles out into the economy, which, of course, the various interest rate indexes all increasing and which results in business loan rates increasing and consumer loan rates increasing.
And then that that sets off a whole other chain of events of lenders being concerned about their borrower’s ability to meet their debt obligations, the repayment because now all their interest costs are higher as well.
So this is a bit of a treacherous time, there’s no doubt. And that’s partly why you see a lot more sellers out there willing to lend their business now.”
The Next Steps to Buying a Business Through the SBA
Don’t miss the rest of the video where Chris Hurn discusses the steps small business owners can take if they’ve found a business they want to acquire and want to finance through the Small Business Administration. This includes the requirements and documents you’ll need to put together to qualify for this type of business loan.
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