Several new business buyers in the United States use SBA (Small
Business Administration) loans to fund their first business purchase or a line of credit. There are some definite
pros and cons for using these funds that business buyers should be aware of. I've listed 5 of the pros and cons so
you can begin to evaluate the process for yourself. Remember all lenders expect to be repaid and businesses are not
100% fool proof.
1. All owners of 20% of the business are required to give a
personal guarantee- When you go to your business banker they are going to request you to sign an application and a
loan that commits you to a personal guarantee for the money you are borrowing. The bank is guaranteed by the
federal government that they will get their money back if your business fails. On your loan documents it will state
the percentage of the guarantee by the SBA. In the event of your default they can legally pursue all borrowers with
2. SBA 7(a) loan lends up to 90% of the loan to value of your
business purchase with real estate- Lenders have now increased their loan to value lending limits to encourage more
business buyers and entrepreneurs to stimulate the economy. Not all lenders will lend up to 90% of the
3. Legal aliens are entitled to SBA lending - Legal aliens in the
U.S. are entitled to the SBA program - you do not have to be a U.S. Citizen to get an SBA loan. In the underwriting
process SBA lenders do look for time that aliens have been residing in the United States and other characteristics
of the borrower that will make sure they can fulfill the terms of the loan.
4. A SBA loan can provide money to business buyers that may not be
able to them in other ways - Financing a business acquisition is tough and the SBA loan can help. The requirements
for SBA lending maybe less than a conventional business loan because the federal government is securing a portion
of the financing.
5. Only about 10 % of business buyers use the SBA loan for a
purchase - According to a recent survey, only about 10 % of all buyers of businesses will use SBA financing to
purchase a business. There are several other forms of financing that business buyers can use that reduce personal
risk for business buyers.
6. In the event of a personal bankruptcy including an SBA loan,
borrowers can not receive another SBA loan until they have paid back the guaranteed portion - I've seen a lot of
questions on the internet about Chapter 7s and SBA financing.