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What is an SBA Loan and How Does it Work?

Posted by Doug Grindstaff in Articles
Small-Business-Loan-Form-by-Website Closers.

An SBA, or Small Business Administration, loan can make all the difference when buying or selling your small business. But what are they really? Why do they help so much and how do you go about getting an SBA loan? All that and more takes a steady hand and solid follow through, find out what you can do and how we can help below. It is important to understand that the SBA does not loan money – the SBA is a government body, set up initially (and funded through SBA Loan Fees) to protect banks that loan in this space. The United States is the only country that does anything like this – and it’s brilliant. Because of this SBA Process, banks and lenders that are open to lending in the small business space are now protected and backstopped by the US Government so that if a failure occurs, catastrophe won’t strike. This results in a heavy amount of lending to small business deal that are less than $5M – and at our firm – it is a critical component of how we do business.

What Is an SBA Loan?

When trying to identify whether you qualify for an SBA loan or even if you should, the first place to start is understanding what it is and what an SBA loan can do for you. A Small Business Administration loan is an effective tool for small business financing that guarantees up to 85% of the loan amount requested, depending on the value of the loan. These loans are provided by an SBA-approved lender such as your local bank. There are 3 different types of SBA loans, SBA 7(a) loans, CDC/504 loans, and SBA microloans.

An SBA 7(a) loan

The SBA 7(a) Loan is a general purpose loan that allows a small business owner to borrow up to $5 million and it commonly carries a 10-year repayment term. These types of loans are exceedingly useful for business expenses, gaining working capital, time-sensitive financing needs, small export businesses, and businesses that must compete on the international stage. When looking to buy or sell your small business, this is the most common type of loan used. There are a few subtypes of SBA 7(a) loans, these include the Standard 7(a) loan, the SBA 7(a) Small Loan, an SBA Express Loan, an Export Express Loan, an Export Working Capital loan, International Trade Loans, and the SBA CAPLines program. To learn a little more about what each type does please see the chart below.


This is a chart describing the types of SBA 7(a) Loans along with their Loan Processing Time and SBA Loan Cap

An SBA CDC/504 loan

Also known as the SBA-approved Certified Development Company loan, the SBA CDC/504 is used to help small businesses afford real estate and equipment. This is a complex loan meant to be used only for buying or updating real estate holdings, machinery, and equipment. Many consider this loan another form of commercial real estate lending. This type of loan has a cap of $5 million with a typical interest rate of 5% and running time of up to 25 years. This type of loan is intricate as part of the loan is provided by your local CDC, a nonprofit corporation that promotes economic development within their community, and the rest is provided by a bank. As an eCommerce business seller ourselves, these are not the types of loans Website Closers regularly interacts with.

SBA Microloans

These are much smaller, much shorter term loans that subsequently carry lower interest rates. These loans are more common for self-employed entrepreneurs, new startups that require very little capital, and small businesses with fewer than 10 employees. With a standing cap at $50,000, these microloans are utilized to start or grow a business. Nonprofit organizations are the largest lenders within this space, they tend to lend to women, minorities, and entrepreneurs in underserved industries. Many microloan programs include mentorship, training, and other forms of business assistance. These loans are also not often utilized by brokerages like us.

SBA Loan Overview

SBA loans are protected through the Small Business Administration, a governmental body created in 1953 to aid small business owners and entrepreneurs in their endeavors. Working to assist and preserve the open market, the SBA focusses on training and protecting small businesses to help them best prepare for success. To this end, the Small Business Administration has loans program for banks and lenders such as those mentioned above to make sure that a lack of capital does not stop an incredible entrepreneur from reaching her dreams. For business buying and selling needs, we work with the SBA 7(a) Standard Loan for buyer and seller financing.


Why Get an SBA Loan?

Whether talking about the buyer side, seller side or even the broker and banking side, an SBA loan can make all the difference in your business sale! An SBA prequalification makes the entire process of buying or selling a company much better and much simpler for everyone involved. It allows a broker to fast-track your deal, it makes buyers more appealing to sellers and it ensures that the seller gets the most out of their hard built successes.

Let’s start with what being “SBA pre-qualified” really means. Right off the bat, it tells everyone on each side of this deal that you are a serious contender. If someone has gone through the entire process of getting SBA qualified, then the brokers and buyers or sellers know that you are committed to making this deal and have the credibility to back it up.

Getting an SBA loan is an onerous process where much of your financial history is put under the microscope. This means that if you or your business has already been qualified that you have what it takes to make this deal mentally as well as cash flow wise. When walking into any business deal, trust must be established, people have to understand your intentions and capabilities and getting SBA Qualified can do just that.


The Seller Advantage


This is a Selling Your Small Business Infographic that focuses on what First Time Sellers need to know about selling a small business.

Diving into the details, an SBA deal gives a seller 85-90% of the cash from a deal on the closing date. For comparison, most non-SBA negotiations end in about 50% up front and a retained equity in the company. That much alone is enough to get a serious buyer some immediate credibility.

By the time a seller gets to the point where they can sit down with a potential buyer, so much time and effort has already been invested. SBA pre-qualifications streamline the process and lower the stress that a seller may be under. With an SBA pre-vetting process through their loan qualification, a seller doesn’t have to sweat the small stuff.

As the SBA process ensures a thorough vetting for the buyer’s ability to actually buy. The seller can also be sure that they are selling to an upstanding person that is serious about growing their business. But a proper business transfer is never just about one side. So, let’s take a look at what the buyer gets in return, and it’s a lot.




The Buyer Advantage

When buying with an SBA loan, the buyer, or lucky new business owner, has a lot more on their side. For a first-time owner, the SBA unlocks a lot of mentorship and learning opportunities as they’ve, in essence, chosen to invest in you. For a seasoned professional, an SBA qualification allows your new company to pay for itself. Put 10-15% down and pay off the loan over an entire decade as your new earnings come in with a much lower interest rate than the average for personal loans. What does this mean for Return on Investment (ROI)? It means that since you’re only putting down 10-15%, your ROI on your initial investment can oftentimes come in less than 1 year! Try investing in anything in this world and get all of your money back in a year, while continuing to 100% own that asset and earn money from it — PLUS — you can sell it one day. Truly is an amazing opportunity for buyers.


The Broker Advantage

Now let’s talk brokers, what we do is facilitate the best possible deal for our buyers and sellers. Our utmost priority is to set all sides up for the best possible success and encourage you to come back or recommend our services to a friend. We can do all that only when we give you the best advice out there, and that’s why we recommend working with an experienced broker from the start.

So how does the SBA process help with that? It allows us to have confidence in all sides of the deal, its as though everyone participating has been pre-vetted. This inspires incredible confidence and cuts down on the amount of due diligence that we must complete before facilitating a serious meeting. The core of our job is to make sure everyone else comes out on top, and that is easier and faster to do with an SBA guarantee.

It is important for buyers and sellers to understand that normally, the SBA process is a minefield where a LOT of brokers fail. They don’t have the volume or the expertise that a firm like Website Closers has, and thus, they aren’t able to achieve high close rates. Our close rates are above 90% on SBA loans – an unheard of rate that is achievable because we have a complete system to not only ensuring they get approved, but also ensuring they actually close. Other brokers avoid SBA loans like the plague, and those that try them selves see close rates below 35%.


The Bank Advantage

Banks are about the numbers and when it comes to small business loans, they don’t have the best track record or approval rate. And that’s where an SBA 7(a) guarantee comes in. When backing a transaction with an SBA stamp of approval, there’s a lot less risk for the bank and pressure for the lending agent.

This is because an SBA loan is when only about 3% of the seller financing is backed by a bank and the SBA takes about 75% or more of the risk, leaving the last 22% or so to the buyer or seller. 10% of that becomes the down payment and what’s left is personally guaranteed by the payer involved, normally with an official promissory note, standing equity, or personal loan. That part is up to the negotiations to solve.

This lack of liability for the banks makes them incredibly apt to approve your loan and give any additional aid they can. The banks, in a set up like this, only stand to gain from your success. This helps your deal get pushed through and to fast-track your necessary due diligence.


An Important Note

It’s important to understand here which banks can, cannot, and should provide an SBA loan. The SBA has preferred lenders which are banks that have been thoroughly vetted by the SBA and it guarantees that their lenders are fully qualified to complete the intricate SBA process. While we primarily focus on PLP (Preferred Lending Program), these are not the only ones out there. Lenders in the PLP are authorized by government (SBA) to make decision through their own underwriting process whether to extend credit to a buyer. Non-preferred lenders also exist and do a lot of loans, especially in the Technology, Internet and eCommerce space. However, they have to submit loan applications directly to the SBA for approval — and that process can take up to a month beyond the lending bank’s approval process. In other words, applying for a loan from a preferred lender is a faster process. In our experience, this usually results in a 1-2 week delay, which in the grand scheme of things is not a big deal.

The point here is that it is important to know what you’re doing and who you’re dealing with throughout this process and that’s why our brokers are here to walk you through it at no additional cost. We want you to succeed and so our experienced team with fully developed banking relationships can be here to back you at every stage of the game. We’ve closed hundreds of millions in SBA loans – we know exactly what it takes to close.


What is the SBA Loan Process?

Many buyers and sellers see the detailed and complicated SBA process as too daunting or confusing. That’s where we come in. Well acquainted with every step of the SBA qualification process as well as the proper prep work to do in advance, our brokers help walk you through it whether you’re a prospective buyer or seller. We highly recommend looping in one of our brokers before you even go to apply so that we can help you be fully prepared and leverage our fully established connections with preferred SBA lenders. When starting this process, have an expert in your corner.

That being said, it’s an important system to understand and making sure that you know what you’re signing up for is the key to a successful loan process. The first thing to understand about SBA Loans is that they use your tax returns as key documents. This means that having your taxes in proper order will make or break your SBA relationship from the start.

When preparing your taxes for an SBA vetting, as a seller, it is crucial to limit your write offs and income loophole usage. When selling with an SBA Pre-qualification, the key performance indicators are defined by your taxes and certain common tax practices can dramatically lower the value of your business. In order to maximize the amount you will be able to list your company for, get advice from your broker before filling. For example, you want to ensure that when you file your taxes before you sell your business, you do so on accrual. Important because if done on a cash basis, the SBA process will not allow an add-back for the difference in cash spend to buy additional inventory (if an eCommerce business), and thus, a seller will have lost hundreds of thousands, if not millions, in deal value.

The majority of rejected SBA loan applications are due to their rigorous and litigious paperwork requirements. It is easy to make one simple mistake and have it tank the entire eligibility process. As experienced brokers we make sure to give both our buyers and sellers the best possible chance at success.

A Full Process Overview

This is an SBA Loan Infographic that explains SBA eligibility, loan timing, flexibility within the SBA process, how your credit score plays into getting an SBA loan and the required documents for applying for an SBA loan.

What the SBA Is Looking For

At the most basic level, the SBA is looking at the same attributes that a bank does when underwriting a loan, except they consider your business’ future potential for profitability alongside your likelihood to be able to pay back the loan (cash flow analysis). They tend to prefer a minimum of 2 years of profitability but there are ways to prove potential with only 1 year of profits.

The SBA has their own ratios of cash flow to profitability that they utilize to determine a buyer’s or seller’s probability for success. In this stage they are looking for industry experience, applicable proven skills, evidence of business leadership and, of course, past revenue as well as income. In this way, the process is a little similar to a job application, they are analyzing whether or not you will be a fit new owner.

Moving further, they take a look at your financial track record, your tax returns, property ownership and credit scores. Throughout this process the applicant is being studied not just by the SBA but by the bank backing the loan as well. The detailed SBA loan process is difficult and complicated, but its incredible results make it more than worth it. Especially when you have an experienced advisor like one of our brokers to advise you throughout it.

The Documents You’ll Need

  1. 2-3 Years of Tax Returns
  2. Business Plans (we can help!)
  3. 2 Year Projections (we can help!)
  4. Your Resume and those of All Employees
  5. Your Employment Records


Using These Tools an Applicant Fills Out the Following Documents

The SBA Loan Application

This is the main form for qualifying, it gives an information summary of the most crucial points.


Your Personal Background and Financial Statements

These forms are used to determine your SBA eligibility with a focus on proven personal financial readiness and similar business experiences.


Business Financial Statements

This set of documents addresses an applicant’s business prowess. It is used to analyze whether or not the business and new owner are being set up for success.

Profit and Loss (P&L) Statement– This is required to have been created 180 days of submitting your application. Supplementary schedules from the last three fiscal years are also included here.

Projected Financial Statements– Here is where your financial plan goes. With expert projections and a solid strategic roadmap this document is all about your likelihood for future success.


Ownership and Affiliations

Here will be a list of names and addresses of any subsidiaries and affiliates, this must include any organizations that the applicant carries a controlling interest in, as well as companies that may be affiliated by stock ownership, franchise, proposed merger or otherwise in a business association with.


Business Certificate/License

This part is simply to prove the legal ability to take control of the company an applicant is looking to purchase.


Loan Application History

Outstanding loans and debt can hurt you here, however a track record of loans repaid can be a strong asset to your application.


Income Tax Returns

As mentioned before, these will help to determine the value and promise of the company moving forward.



The personal résumé(s) of each principle on the loan. This is about whether the person is well-qualified to take the prospective business to the next level.


Business Overview and History

This is where the business is explained in detail and the reason for the loan application is submitted.


Business Lease

Include a copy of your business lease, or note from your landlord, giving terms of proposed lease.


If You are Purchasing an Existing Business

The following information is also submitted:

Current balance sheet and P&L statement of business to be purchased

Previous two years federal income tax returns of the business

Proposed Bill of Sale including Terms of Sale

Asking price with schedule of inventory, machinery and equipment, furniture and fixtures



Part of the SBA process is a Q&A that basically serves as an interview to see if the buyer is ready to take on the responsibility of a whole new business. Our brokers have seen quite a few of these and can help prepare you to put your best foot forward. This interview will focus on both your financial and business plans.

It is important to do industry research, have a deep understanding of your previously submitted business plans and projections, and have a solid repayment framework set up before walking into this meeting. Having a broker with you will make all the difference both for your confidence and your preparedness.

For the most point, this stage isn’t about throwing curveballs, it’s about assessing a person’s readiness to take on a loan like this and a prospective business with a strong plan in place to ensure that everyone involved is poised for success. That’s not to say this isn’t a nerve-wracking process, it absolutely is, but the payoff will be worth it.


Some Tips from the Experts at Website Closers

Reach out to a broker far in advance of applying for an SBA qualification

As mentioned earlier the tax returns are the key to your business’ valuation with an SBA process. As they look back on 3 years of tax returns, meet with one of our brokers soon even if you’re not looking to sell soon, to make sure that you’re on the right track.


Walk into this process with an open mind and all documents prepared in advance

The SBA loan process can demand a lot of a person, set yourself up to achieve your goal by doing your research, consulting with experts and remembering that patience is key.


Understand that some things are standard operating procedure

When giving a large loan, the bank is required to take collateral. This means that the SBA process will lead to a lien on any property that you own 20% or more equity on. This can be stressful and means that these properties cannot be sold through the duration of the loan.


While we recommend this process, it’s not for everyone

There are many advantages to an SBA qualification, but every loan has responsibilities and strings attached. There are deals, companies, buyers, and sellers that it just won’t be a good fit for. But there are plenty of companies listed with us that don’t require SBA partnerships and have different types of seller financing as well.


It may not seem like it, but this is an incredibly efficient process

There is a lot going on at once here and while it sure doesn’t feel like it, this is a proven and streamlined process for getting your sale off the ground. At least for our firm it is – we know that isn’t the case for other firms that attempt to work within the SBA SOP.


Know your insurance options

An SBA loan requires that the applicant have a life insurance policy with extremely specific requirements. Go through one of our trusted providers to ensure that a technicality like this doesn’t stand in your way.


The Bottom Line.

There’s a lot to consider when contemplating an SBA loan. We cannot recommend enough that a buyer should sit down with one of our experienced brokers before beginning this process; we don’t charge for this information and our process is designed to help you reach your goals effectively. The path to getting SBA Qualified can seem like a long and grueling process and that’s where having expert advice will truly have an impact.

When it comes to an SBA loan application, there are many moving parts, keeping track of your paperwork, financials, and timelines are key components of getting approved and that much closer to buying or selling your small business. As a government agency designed to help the growth of small businesses, the SBA wants to approve you and being well prepared for the SBA process is the best way to ensure your success.

An SBA loan is incredibly advantageous for buyers, sellers, banks, the economy and our brokers, but if you’re still not sure if getting SBA qualified is the best route for you, give our team a call and we’d be happy to discuss it with you. Facilitating the purchase and selling of businesses is what we do, all day, every day. It’s our bread and butter and that’s why we’re here to answer your questions.


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