SBA Acquisition Loan Terms: What You Sign Up For

The Terms At A Glance

An SBA 7(a) loan to buy a business is a term loan that you repay in equal monthly installments until it is paid off. Most of its structure comes straight from SBA's rulebook, which is why acquisition loans from different lenders look so similar on paper.

The pieces the lender controls are mainly pricing, its fees within SBA limits, loan covenants and its reporting requirements. Those are what lenders compete on, so it pays to see more than one offer.

Repayment: Up To 10 Years, No Balloon

SBA requires every 7(a) loan to have a stated amortization and maturity, and it does not allow a balloon. For a loan that finances a change of ownership, the amortization cannot exceed 10 years, except for the real estate cases below.

That 10-year limit covers everything except real estate: goodwill, equipment, inventory, working capital and the closing costs you roll into the loan. Lenders cannot stretch it by calling something else.

Fully amortizing means each payment covers interest and a slice of principal, and the last payment pays the loan off. There is no lump sum due in year five that you have to refinance, which is a big difference from many conventional business loans. It also means your payments are higher than they would be on a longer term, which is why the cash flow test matters so much. See how much business you can afford.

When Real Estate Is Part Of The Deal

If the building comes with the business and the business occupies it, SBA lets the real estate portion repay over up to 25 years. There are two ways to set it up:

• Separate loans. One loan for the business on up to 10 years, and one for the real estate on up to 25. The real estate can also go through the SBA 504 program as its own loan.
• One blended loan. The term is a weighted average of the uses of the money, rounded to the nearest full year. Only the real estate share gets up to 25 years. Everything else counts at 10. The 504 program cannot be blended.

The general 7(a) rule that lets a loan run 25 years when 51% or more of it is real estate does not apply to business purchases. For acquisitions, Appendix 15 of the SOP governs.

The special purpose property exception. When the business operates from an owner-occupied special purpose property that cannot be separated from the business, and 85% or more of the total project cost is real estate, the lender can make one loan on up to 25 years. Think of properties built for one use. Elsewhere in the SOP, SBA lists examples such as car washes, gas stations, hotels and funeral homes with crematoriums.

Our guide to buying a business with real estate goes deeper on both structures.

Real loans we placed. Borrower and lender names are kept private. See all closed deals.

Collateral And The Personal Guaranty

Business assets. The lender takes a lien on all the assets you are buying: equipment, vehicles, inventory, receivables and any real estate. SBA measures whether the loan is "fully secured" using discounted values. Improved real estate counts at up to 85% of market value, used equipment at 50% of net book value (or 80% with an orderly liquidation appraisal), and receivables and inventory at just 10%.

Personal real estate. Most acquisitions are mostly goodwill, so they are rarely fully secured by business assets alone. When there is a shortfall, the lender must take available equity in personal real estate owned by each 20%+ owner and guarantor. That includes your home, unless the equity is less than 25% of the property's value.

Collateral is not the decision. SBA does not let a lender decline a loan solely because the collateral is short. Cash flow decides; collateral is taken where it exists.

The personal guaranty. Every individual who will own 20% or more after the sale signs an unlimited personal guaranty, and the lender can ask others to sign too. Each guarantor provides a personal financial statement dated within 90 days of approval.

Fees You Will Pay

The SBA guaranty fee. SBA charges the lender an upfront fee on the guaranteed portion of each loan, and the lender is allowed to pass it to you. The percentage is set by SBA based on loan size, and SBA can adjust it for a given fiscal year. You can pay it from the loan proceeds, which is what most buyers do.

Packaging and closing costs. A lender may charge a reasonable, itemized packaging fee within SBA's limits, plus out-of-pocket costs like the valuation, appraisals, lien searches, recording fees and its attorney's hourly charges.

Fees lenders cannot charge. SBA prohibits lenders from charging you commitment, origination, broker, commission or referral fees, points, renewal fees or prepayment fees. A broker like GoSBA is paid by the lender after closing, at no cost to you.

Most of these costs can be included in the project and financed. See closing costs when buying a business.

Paying The Loan Off Early

On a 10-year acquisition loan, there is no prepayment penalty. SBA prohibits lenders from charging prepayment fees, and SBA's own fee only applies to loans with a term of 15 years or more.

On those longer loans, usually blended loans that include real estate, SBA charges a subsidy recoupment fee if you voluntarily prepay more than 25% of the loan in any one of the first three years. The fee steps down each year and ends after year three. In the blended example above, the 15-year term means this fee would apply.

If you plan to sell the building or refinance in the first few years, tell your lender before you choose between separate and blended loans.

What Is Up To The Lender

SBA sets the frame, but each lender decides:

• Its pricing, within SBA's maximums
• How much working capital it will include
• Covenants, such as a minimum cash flow coverage it tests each year
• What financial reports you send after closing, and how often
• Whether it pairs the loan with a line of credit at closing

These are worth comparing offer by offer. We put your deal in front of the lenders that fit it, so you see real terms side by side. When you are ready, request a pre-qualification letter, or start with the overview of SBA business acquisition loans and how SBA acquisition loans work.