Interested in starting a small business? If so, you don’t always have to start from scratch. Instead, you might want to buy a business that’s currently for sale. Fortunately, there will be more opportunities to buy them in the future.
For example, many boomer-age business owners are looking to retire and earn money. On the other hand, you have entrepreneurs who are rocked by inflation and recession and should put their business up for sale.
This is great if you are considering owning a new business. However, this begs the question: how do you get the funds to buy one?
This video answers that question and lets business owners know where to get a loan to buy a business.
An excellent option, Chris Hurn, Founder/CEO of Fountainhead Commercial Capital, tells us, is a loan backed by the US Small Business Administration.
In this latest episode of SmallBiz in:15, Chris Hurn sits down with Shawn Hessinger, the editor of Small Business Trends to discuss this topic in depth.
Other key points that Chris Hurn covers in the video are where to go to get the steps small business owners can take if they have found a business they want to acquire and want to fund through the Small Business Administration. Its catches include the requirements you will need to meet and the documents you will need to gather to qualify.
If you are interested in finding out how to buy a businessyou won’t want to miss Using SBA Loans to Buy a Business.
Meanwhile, you can talk to Chris Hurn at https://www.fountainheadcc.com/ if you need more information after watching this episode.
May I Get an SBA Ready to buy a business?
Can you get an SBA loan to buy an existing business? Turns out you can, according to Fountainhead Commercial Capital founder Chris Hurn, read on to see excerpts from his interview with Small Business Trends and find out how.
Shawn: What are the benefits of using an SBA-backed loan to acquire a business?
Chris: Typically, small business borrowers use SBA loan programs because the down payment or capital injection is often half or a third of what a regular conventional bank loan would require. So that’s a huge upside, especially coming out of the pandemic when people realize how valuable their capital is.
“The second big reason people like SBA loans is that they generally have much longer repayment terms than regular and conventional banks.
So it’s not uncommon to have a 25 year amortization, for example, on a commercial real estate transaction with an SBA loan, whereas most banks are probably going to be more like a 15 or 20 year amortization – quite frankly , probably have a lump sum payment after 5, 7, 10 years where you don’t have that in the SBA world.
Those are probably the two biggest benefits,” says Chris. You also have the ability to use the loan proceeds in a much broader way than is often available for a business loan from a conventional lender.
What I mean by this, in particular, is that an SBA 7A loan can be used, not only for other purchases, refinances, renovations and constructions of occupied commercial real estate, but also for business loans. business acquisition… which are nearly impossible to obtain from a regular conventional or non-SBA bank.
We also use proceeds from the SBA 7A for partner buyout loans; we use them for working capital purposes, a lot of franchise financing is done with SBA 7A loans, leasehold improvements/outfits, renovations are done with 7A, equipment financing – we do a lot of corporate debt refinancing with 7A. So it’s just a very versatile lending product and it tends to be much, much more flexible and versatile than regular conventional banks.
These are the main reasons why people like to use SBA loans.
Shaw: What is an SBA bank loan and how does it differ from other types of loans?
Chris: Basically, the SBA has been around since the early 1950s. In fact, I think July is his 69th birthday. And it’s the only division of the federal government that focuses on entrepreneurship; the growth of small business in America. That’s a big deal since nearly half of America’s employment is done through these companies.
“So in terms of what the SBA is supposed to do…the SBA is not a lender…and I get this question a lot, people don’t necessarily realize that, they just assume that the SBA is the one who finances all these loans. They are not.
The SBA is actually meant to be a safety net for private sector lenders, they actually provide effective insurance…it’s called a government guarantee.
So on a typical SBA 7A loan, which we’re talking about, we have a federal government guarantee of 75% to 85% of the loan amount, depending on the size of the loan and so on.
And so the reason it exists is that it’s meant to incentivize lenders like us to offer more favorable terms. To make a loan that might be on the margin that we wouldn’t do necessarily want to do things conventionally, for example.
I’m not suggesting that we make bad loans; the SBA is definitely not trying to encourage lenders to make bad credit decisions. But they want to help lenders cross the line if something is a bit in the gray area.
And frankly, when we’re able to extend longer terms, it helps the business owner lower their monthly exit rates and keep their cash flow as positive as possible when they have a longer term to repay it. The same with a much lower down payment.
Why there’s never been a better time to use an SBA loan to buy a business
Shaw: Speaking of which, using SBA return loans for acquisitions, what is the particular relevance right now to this topic?
Chris: If we’re talking about business acquisitions, as opposed to just commercial real estate acquisitions, then the reason it’s a much more relevant topic these days is that there are so many owners of companies who are retiring, reaching retirement age.
“You know, about a year ago I saw a statistic that 56% of all American small and medium businesses are owned by baby boomers. It’s no secret that there’s about 9,000 baby boomers retiring every day for the next nine years.
So there will be a boom in business acquisition opportunities because most business owners don’t want to just close the business and get nothing in return. They would much rather sell the business if that is a possibility.
And, frankly, most of these people don’t really want to hold the paper and don’t want to do seller financing. They’d rather someone come and pay them cash or, you know, someone who gets financing… actually pays cash through financing.
So that’s something you’re going to see a lot more of in the future. Times like what we just went through with the pandemic, I think that accelerated some people’s desire to get out a little faster, maybe. The same with when we go through a period of inflation. I think you’re going to see more and more sellers wanting to move on.
Shawn: You mentioned inflation. And I was wondering if inflation, coupled with the worries we’re now hearing in the press about a possible recession, might also be accelerating people’s interest in pulling out money to get what they can from their business and move on.
Chris: That’s exactly what I was referring to here. It certainly happens more in times like these. Also, the downside that we were talking about a few minutes ago, why some banks don’t want or a lot of conventional banks don’t like to participate in some of them, is partly due to the macroeconomic environment in which we we find .
“When inflation rises, as it has for the past year or so, that obviously puts doubt in a lender’s mind as to that borrower’s ability to repay. You know, as their costs go up in all areas, whether it’s labor costs or inventory costs or, you know, just a variety of different things, fees shipping.
And then, of course, to keep inflation in check, one of the best tools is often the Fed to raise its short-term borrowing rates, which then trickles down into the economy, which, of course, various interest rate indices all go up and that translates into an increase in business loan rates and consumer loan rates.
And then that sets off a whole other chain of events where lenders worry about their borrower’s ability to service their debts, the repayment, because now all of their interest charges are higher as well.
So it’s a bit of a treacherous time, no doubt. And that’s part of why you’re seeing a lot more sellers willing to lend their business now.
The next steps for buying a business through the SBA
Don’t miss the rest of the video where Chris Hurn discusses the steps small business owners can take if they have found a business they want to acquire and want to finance through the Small Business Administration. This includes the requirements and documents you will need to gather to qualify for this type of business loan.
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