SBA Loans for Business Acquisition

Learn how to fund a business acquisition using an SBA loan – whether it’s for a complete purchase, partner buyout, or partial buy-in.

While many business owners want to start from the ground up, others may choose to purchase a business that’s already been established. Some entrepreneurs may choose to purchase 100% of a company while others may choose to buy a percentage of an existing business that they have no prior affiliation with. Existing owners may also choose to buy out a partner to gain ownership of a larger or more complete share of the business.

Whatever your pathway to ownership is, using an SBA loan can help you get there.

The Basics of SBA Loans

SBA loans are designed to make capital more accessible to small businesses when it isn’t available elsewhere. These loans are offered through traditional lenders, like SouthState, and are backed by the federal government’s Small Business Administration. Because of that backing, SBA loans often have more favorable terms than other small business loans. Get a complete overview of SBA loans here.

There are a few types of SBA loans available. For a business acquisition, you’ll need an SBA 7(a) or an SBA Express loan. Borrowing amounts differ with each.

Learn more about the different types of SBA loans here. 

Some Advantages of SBA Loans

Repayment Terms

For business acquisitions, SBA loans can have repayment terms up to 10 years. For real estate purchases, terms can go to 25 years.
 

Loan Amounts

Entrepreneurs can borrow up to $5 million with an SBA 7(a) loan, whereas an SBA Express loan has a limit of $500,000.
 

Interest Rate Limits

Rates may vary, but the SBA sets a maximum rate allowed, depending on the amount borrowed. For instance, a loan of $500,000 would typically receive the base rate of Wall Street Journal Prime plus a maximum of 3%. In addition to this, SBA loans can have a variable or fixed interest rate.

Types of Ownership Changes Covered by an SBA Loan

SBA loans allow for several ways to gain ownership of a small business. Here’s a breakdown of each: 

SBA Loan for a Complete Buyout of an Existing Business

In this scenario, you’re using an SBA loan to help you buy 100% of an existing business, whether through the purchase of company stocks or assets. Once the sale goes through, the current owners will no longer be involved in the business.

Things to remember for a complete buyout
Any individual or entity that owns 20% or more of business after the sale will be required to provide an unlimited guarantee, which holds them personally responsible if the business defaults on the SBA loan.

If you’re making an asset purchase, you’ll need to create a new legal entity that will purchase all the assets of the seller’s entity. For this type of acquisition, a new entity can be created by setting up a new Employee ID Number with the IRS. In addition to this, you will also need to register your business with your state’s Secretary of State and, depending on the type of business you’re purchasing, you will also need to create new Bylaws or Operating Agreements. 

In a situation where the seller has existing contracts tied to the business or EIN, a stock purchase could be more beneficial than an asset purchase. 

If you’re making a stock purchase, you will be purchasing the current owner’s stock or member-interest of the existing legal entity and will need to update the existing Bylaws or Operating Agreements, as well as update the registration with your state’s Secretary of State to reflect this.  

SBA Loan for a Partner Buyout of an Existing Business

In this situation, an existing business partner (or partners) will be using an SBA loan to purchase the interest or shares of another existing business partner.

Things to remember for a Partner Buyout
Any individual or entity that owns 20% or more of business after the sale will be required to provide an unlimited guarantee, which holds them personally responsible if the business defaults on the SBA loan. All beneficiaries of the loan proceeds will need to be listed as borrowers on the loan, therefore the business and the owners purchasing additional shares are considered direct borrowers on the loan. 

You’ll also be required to update the Bylaws or Operating Agreements for the existing business, outlining the new ownership structure along with any new roles and responsibilities.

SBA Loan for a Partial Buy-in of an Existing Business

In this situation, the borrower would be purchasing up to 99% of the interest of an existing business with the current owner or owners remaining part of the business going forward.

For purchasing a business where the seller has the professional certifications and the buyer does not, such as in the professional trades or medical services (like a roofing or HVAC company, or a dental practice) the method of a partial buy-in allows for greater flexibility for the owners to transition all required licenses and certificates.

Things to remember for a Partial Buy-in
Any individual or entity that owns 20% or more of business after the sale will be required to provide an unlimited guarantee, which holds them personally responsible if the business defaults on the SBA loan.

You’ll also be required to update the Bylaws or Operating Agreements for the existing business, outlining the new ownership structure along with any new roles and responsibilities.

Other Factors to Consider about SBA Loans

Time

Once all the terms for a full loan application are received, it may take between 30 to 90 days for borrowers to receive funds depending on the type of project you are requesting funds for.
 

Equity Requirements and Collateral

SBA 7(a) loans usually require a 10% downpayment, as the SBA requires at least 10% equity in a new business or change of ownership. Your lender may require collateral, such as a lien on all business assets, equipment and inventory to secure the loan, or they may require personal collateral like real estate.
 

Solid Credit

Though SBA loans are less risky for banks, you’ll still likely need a credit score of at least 660 to qualify.
 

No bankruptcies in the Last Three Years

 

No Federal Loan Losses

Borrowers can’t have any defaulted federal loan debt.
 

Check the Rates

To get the best terms, research plenty of lenders. SBA loans are always available if other options don’t work out.
 

The Benefits of an SBA Preferred Lender

While plenty of banks offer SBA loans, working with an SBA Preferred Lender, like SouthState, can streamline the process. Preferred Lenders have the authority to make final credit decisions, which can speed up the time it takes to complete your business acquisition.
 

What You’ll Need to Apply for an SBA Loan

There’s plenty to think about in a business acquisition but being prepared for your SBA loan application can help keep things moving. While additional paperwork may be required, here’s a start of what you’ll need with most banks.
 

• Agreement to purchase the business
• Letter of intent to buy the business
• Last three years of tax returns for the business
• List any outstanding business debt
• Proof of business assets
• Any long-term business contracts
• Incorporation documents and any business license(s)
• Business plan and relevant experience

Ready for the Next Step?

SouthState Bank specializes in providing long-term financing through the SBA loan program. We’re an SBA Preferred Lender and our experienced team can help you navigate the loan process every step of the way. Get started here.