Closing SBA Loans Sucks But It's Worth It

SBA loans are the magic wand of SMB acquisitions. They enable very low down payments (10%) with relatively low interest rates or giving up equity. But closing an SBA loan is a marathon of documentation. Let's prepare you for what you need.

Let's start by understanding why SBA loans have so much red tape. The goal of SBA loans to support small business formation (and acquisition). Without the government guarantee, most lenders would view SMB's as too risky and definitely wouldn't lend up to 90%. In order for the program to be effective, we need both a large number of loans (>61,000 in 2021), while preventing abuse of the government guarantee. The result is a long list of tight requirements that every loan has to meet in order to qualify for the SBA guarantee. The next factor is understanding the risk-reward of SBA loans for the banks. The SBA guarantees 75% of the loan amount as long as the requirements are met. As a result, the bank will do whatever it takes to secured the guarantee, even is it makes the deal riskier.

Banks can have additional requirements, but here's a pretty fulsome list of documentation you will need to close your SBA loan. You can find the full list in an easier format in today's newsletter. I post about searching, SMB ops and investing and if subscribers get a free list of 5,000 business brokers.

Business Information:

Credit application: SBA Form###-###-#### potentially bank equivalent)

Business Plan and Financial Projections

Internal Financials (3 years + year to date) - Profit & Loss and Balance Sheet

Business Tax Returns (3 years)

AR / AP Aging

Bank Statements (1-3 years)

Business Debt Schedule and loans to be paid off

PPP loans received and PPP loan forgiveness

Certificate of formation for the acquiring entity

IRS SS4 as evidence of Federal Tax ID for the acquiring entity

Any required licenses and local tax permits (sales and use tax) for the acquiring entity

Recorded Fictitious Business Name Statement, if you continue using the selling business’s name as a “doing business as”

Vehicle Payoff Letters

Business Appraisal

Personal Information:

Credit application: SBA Form###-###-#### potentially bank equivalent)

Identification of buyers and sellers (drivers license)

Buyer resume

Personal tax returns (3 years) buyers and sellers

Form 4506C buyers and sellers

Life insurance for the loan amount - If you want to take out a multi-million life insurance policy, you are likely required to have a health check appointment. This process can take 6-8 weeks, so start early

SBA Form###-###-#### Personal Financial Statement

Seller statement

Equity Funding:

Bank statements showing funds are seasoned for two months - This is a topic for a separate post, but essentially all investors including the searcher have to have prove that they have had the funds for their investment for 2 months

Transaction screen prints showing the funds were wired and received

Explanations for any transaction amounts in excess of $5,000 - This can be painful for your investors if they make the investment out of an account that has a lot of large transactions flowing through

Legal Documents:

Operating Agreement for the new entity

Subscription Agreements for investors

Purchase Agreement, including the full list of assets to be acquired and their valuation (SBA Form 4a) and purchase price allocation

Seller non-compete

Employment agreement with key employees - Note that key employee is a defined term for the SBA that they will require to sign their own SBA 1919 forms, so make sure to avoid the term unless necessary

Seller Note

Office / Warehouse Lease

Office / Warehouse Lease Assignment

Landlord Waiver and Consent

Vehicle Lease Assignments

Closing Documents (Escrow Agreement, Buyer & Seller Entity Resolution, Assignment & Assumption Agreement, Bill of Sale, IP Assignment)

Titles / Certificates Insurance:

Tax Clearance Certificate

General Liability Insurance - in asset deals, you have to get new insurance policies. You can’t transfer the existing insurance. Takes several weeks.

Worker Compensation Insurance

Business Personal Property Insurance

Business Interruption Insurance

Auto Insurance

Title to any vehicles transferred