Buying a Business With an SBA Loan — What Happens to the Seller’s Existing Loan?
When a business you are considering buying carries an existing SBA loan, one of the first questions to address is what happens to that debt at closing. The answer is not always obvious, and mishandling it can expose you to liability you did not expect or delay a transaction that you thought was ready to close.
SBA Loans Are Generally Not Assumable
In most cases, SBA loans cannot simply be assumed by a buyer. SBA loan approval is based on the creditworthiness, experience, and qualifications of the borrower — typically the seller and the seller’s business. A new buyer is a different borrower, and the SBA lender will not automatically transfer the debt obligation to someone it has not underwritten.
There are limited circumstances under which an SBA loan assumption may be possible — typically when the buyer meets the SBA’s eligibility requirements and the lender and the SBA consent to the assumption. This process can be time-consuming and is not guaranteed. Buyers who assume they can simply step into the seller’s loan are frequently surprised to discover that the lender requires payoff at closing.
The Typical Approach: Payoff at Closing
In most business acquisitions involving a seller with an outstanding SBA loan, the cleanest path is to pay off the SBA loan at closing from the sale proceeds. The purchase agreement specifies that the seller’s SBA debt will be satisfied from the proceeds of the sale, and the lender provides a payoff letter confirming the amount required to release its lien. This approach gives the buyer a clean transaction without inheriting the seller’s debt and lien obligations.
The payoff amount needs to be factored into the deal economics. If the purchase price is $1 million and the seller has a $400,000 SBA loan, the seller’s net proceeds are $600,000 less other closing costs. A seller who did not account for this in their price expectations may be surprised by the net amount they receive.
SBA Collateral and Lien Releases
SBA loans are often secured by the assets of the business and, in many cases, by a lien on the seller’s personal assets including their home. As part of the closing process, the SBA lender must release all of its liens — on business assets and on personal collateral — in exchange for the payoff. Coordinating lien releases with the closing timeline is an important part of transaction management, and delays in obtaining releases can push back the closing date.
New SBA Financing for the Buyer
Many buyers of small businesses use their own SBA loan — obtained in the buyer’s name based on their own qualifications — to finance the acquisition. This is a separate transaction from the seller’s existing SBA debt. The buyer’s SBA lender conducts its own underwriting, approves the loan based on the buyer’s creditworthiness and the projected cash flow of the business, and funds the loan at closing. Part of those proceeds are used to pay off the seller’s existing SBA debt as part of the same closing.
Buyers using SBA financing for a business acquisition should work with a business attorney to coordinate the transaction, the lender’s requirements, and the payoff of any existing seller debt at closing. For more, see our pages on buying a business and our post on SBA loans for business acquisitions.
Buyers using SBA financing for a business acquisition are welcome to schedule a consultation with Russo Law LLC to coordinate the transaction, lender requirements, and payoff of existing seller debt at closing.
Disclaimer
The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. This corporate lawyer blog post is for informational purposes only and does not constitute legal advice. It is not an offer for Russo Law LLC to represent any party, nor does it create an attorney-client relationship. No action or inaction should be taken based on the information provided without seeking professional legal counsel. This post is intended for businesses in New York and New Jersey. It may not reflect laws in other jurisdictions.
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