Business Financing - Where to get it and why you would want a SBA Loan and Seller Financing
Business financing can come in the
form of conventional loans, SBA (Small Business Administration)
loans, and seller financing. A combination of the three forms may be used, but SBA loans
are by far the most popular. In fact, SBA loans are the primary source of capital injected
into the small business community nationwide. Last year the SBA assisted
small businesses with over $10 Billion Dollars of loan
The Small Business Administration
more commonly known as the SBA is a Federal Agency established in
1953 to protect and assist America's greatest resource ... small
businesses. SBA's mission is to stimulate and foster economic development through
small businesses, because helping small businesses get started and
become successful is great for the nation's economy. Briefly, the SBA loan
guarantee program works in the following manner. The SBA will guarantee a
portion of a business loan made by a lender enrolled in the
program. By issuing a partial Federal Guarantee to the Bank, your loan, which might not be
approved on conventional terms, can now be approved via a SBA
SBA Loan benefits include longer
terms and larger loan amounts than you might be able to obtain
through a conventional loan. They also include competitive interest rates and no balloon
payments or annual reviews. Furthermore, SBA loans are fully amortized and loan terms
typically range from 7 to 25 years depending on the purpose. To understand the benefits
of full amortization, consider a loan that is used to purchase
commercial real estate.
The conventional bank loan is
normally amortized over 15 to 20 years and renewed every 3 or 5
years. So, when a small business owner faces the 3 year review of that conventional loan:
- The bank may decide that its risk appetite
no longer favors loans for those types of businesses and therefore
requires full payment.
- The bank may review and reamortize the
loan over another 15 to 20 year period, which would mean more
interest over the term of the loan.
- If the small business is doing well, the
bank may renew the loan as is, but often the borrower has to pay
thousands of dollars in costs associated with the renewed loan
All of that uncertainty and
additional expense for refinancing or restructuring of the loan is
eliminated with SBA financing.
SBA loans are also easier to secure
because they are offered by private lenders, and are not restricted
by regulatory constraints that make bankers hesitate to lend to
small businesses. The typical private lender offers from $100,000 to $2,000,000 financing
(more or less depending on the lender).
As a buyer, seller financing should not be
overlooked. How much money is the seller looking for as a down
payment? Will the seller finance some of the purchase price? Is there another lender
involved (like a bank or a former owner)? Is there an assumable
loan? What is the current balance of each loan the business has now? This is an essential area of
inquiry if you are trying to save time. Most sellers are unrealistic
in the early stages of selling their business, even if it is listed
with a broker. Sellers usually hope for an all-cash buyer. Most buyer prospects are
also unrealistic - buyers are often looking for 100% seller
financing! In reality, the "average" deal is closer to 30-50% down in cash from the buyer
with 50-70% financing from the seller, SBA, and banks.
Most first-time business buyers need seller
financing. Sellers are much more likely to finance buyers they like, regardless of
experience. But it can take time for sellers to warm-up to this idea and to a particular
buyer prospect. Seller financing is great because it shows that the seller believes in the
business, but most importantly he or she believes that you can run it profitably!
Click here if you are looking for hotel financing, motel financing, financing for commercial real estate, business purchase, franchise opportunity, or if you need a business loan for equipment or working capital.
Click here to return to our Buyer's Guide.