What SBA Lenders Look For When You Apply to Buy a Business
Applying for an SBA loan to acquire a business is more involved than consumer lending. The underwriting process evaluates the business’s economic viability, the buyer’s qualifications, and available collateral. The SBA’s fund your business resources provide a general overview. This post focuses on what happens during lender underwriting for a business acquisition loan specifically.
Cash Flow Is the Primary Focus
The most important underwriting factor is whether the acquired business generates sufficient cash flow to service the proposed debt. Lenders calculate a debt service coverage ratio and require that the business’s normalized net operating income meaningfully exceeds annual debt service. Lenders will request several years of tax returns and financial statements and will adjust reported income for owner compensation and non-recurring items to arrive at a normalized cash flow figure. Discrepancies between tax returns and financial statements — common in small businesses — require explanation.
Buyer Qualifications
SBA lenders evaluate the buyer’s industry experience, management capability, personal credit history, and overall financial position. Personal guarantees are typically required from all principals owning more than 20 percent of the acquiring entity. Buyers with directly applicable industry experience face a lower bar than those entering an unfamiliar industry.
Equity Injection, Collateral, and Valuation
SBA loans typically require a ten percent equity injection from the buyer’s own funds. The loan is secured by business assets and in some cases personal real estate. Lenders will also evaluate whether the purchase price is reasonable relative to the business’s value — if the price significantly exceeds lender valuation, they may require an independent appraisal or limit the loan amount accordingly. Business buyers in New Jersey and New York should work with a business attorney to review loan documentation and protect their legal interests throughout the process.
Disclaimer
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