The 3 Questions to Ask Yourself if You Want an SBA Loan

If you’re looking to leverage SBA funds for your acquisition, ask yourself:

1. Do you have relevant industry or management experience?
2. Do you have the personal liquidity to provide the cash injection?
3. In addition to liquidity, do you have assets that make your PG meaningful?

If you have all three, then you’re in a fantastic position to secure an SBA loan.

Even if you only have #1 or #2 & #3, you’re still at an advantage.

Experience goes a long way for lenders. If you’re light on liquidity but have a strong background for the deal, lenders are generally more flexible on using a seller note towards the cash injection. Some lenders will allow borrowers to bring less than 5% to the deal.

But if you have none of the above, then what are you bringing to the table? This is the question you’ll need to answer for lenders.

If you don’t have meaningful cash and assets on your PFS, then it’s not enough to be the one providing the PG. Because what recourse would a lender actually have?

If you don’t have relevant experience and you aren’t planning to bring your own cash into the deal, then you need to consider how you can mitigate the risk of the deal for lenders.

Here are two ways:

1. Have the seller retain at least 10% equity. Keeping them involved in the business will give lenders more confidence in the acquisition and greatly improve your chances of success as an industry outsider.
   
2. Get the seller or a higher net worth individual to PG with you. Obviously, this is a big ask. But again, you have to think of it from the lender’s perspective. If you’re buying a $4M business without collateral and you’ve got $100k, what is the lender’s recourse if you default?

Seller notes can also be a way to make a deal more appealing, particularly if they are larger, on some level of standby, and have forgivable language.

Having investors or a board of directors with industry experience is not usually a compelling way to mitigate your lack of experience and liquidity. If they’re not PGing with you, lenders don’t have assurance they’re going to stick around and get down into the weeds with you when things get tough.

So, if it’s your goal to close an acquisition this year, what are you bringing to the table?