Exposing the Myths: SBA vs. Conventional Lending for Acquisitions

The Small Business Administration (SBA) offers lending programs that are often misunderstood as a cumbersome, last resort loan funding option. Much of this misperception is centered on borrower experiences with banks that do not specialize in SBA lending, are not preferred SBA lenders, or do not have the specific lending expertise or knowledge of the complexities of mergers and acquisitions.

As a lender at Live Oak Bank, I frequently get questions from customers of this nature. I’ll attempt to debunk the common myths looming about SBA lending.

Myth: SBA loan products are not borrower friendly.

SBA loans were created to be borrower-friendly.  In comparison to conventional loans, they are more flexible with equity and collateral requirements, have longer repayment terms and do not have financial covenants or balloon payments. For example, a conventional loan may have a 10-year amortization with a balloon in three to five years, while an SBA loan offers a seven to 10-year amortization and term, no balloon payment and can even provide up to a 25-year amortization and term if there is a real estate component to the acquisition. In most cases, the industry standard interest rates charged under the SBA are more favorable than a conventional non-SBA bank loan.  

Myth: The lending process is slow and inefficient.

SBA lending requires numerous documents and can be tedious for borrowers when the lender is not a specialist. For the most part, the amount and type of financial information required under the SBA is the same information required by conventional non-SBA banking options. When considering an SBA loan, it is helpful to seek out a lender who is part of the SBA’s Preferred Lender Program (PLP). A PLP lender will know how to determine eligibility, properly structure the loan, and collect appropriate documents to keep things moving smoothly. PLP status allows the bank to approve the loan without waiting for the SBA’s approval; the bank acts on behalf of the SBA. Experienced SBA M&A lenders know the potential acquisition deal-killers and can address issues early, creating an efficient and successful transaction.

Myth: The SBA lends money directly to small business owners.

False! In an SBA loan, the bank makes the loan, but the debt is partially guaranteed by the SBA. This structure allows the bank to provide credit for a borrower who may otherwise have difficulty obtaining a loan with such favorable terms. The SBA acts like an insurance company, allowing the bank to extend beyond its traditional credit reach.

Myth: Any small business can receive a small business loan.

The old school perception that the SBA is only for underperforming businesses and/or borrowers with bad credit is a myth.  In fact, the SBA program can be used to finance quite sophisticated businesses with high-end loan structures.  The existence of the SBA guaranty does not outweigh competent underwriting.

There are specific eligibility requirements within the SBA program which are prescribed by the SBA and apply to all lenders within the program.  Beyond those, a lender will use its judgment and standards by exploring the “5 C’s” of the customer which are credit, character, capacity (cash flow), collateral and condition of the business. A lender who knows acquisitions AND the SBA has the specific knowledge to understand these components as they relate to business ownership and evaluate your entire financial picture to structure a loan that meets your needs.

An SBA loan can be a desirable option for those seeking to acquire a business.  Do your research and find a bank that knows your industry, has extensive acquisition experience and is a designated preferred lender, and you will be on your way to securing your dream of acquiring a business.

Myth:  SBA requires extensive collateral

While the SBA program guidelines do require lenders to take certain available collateral such as junior liens on real estate which has available equity, the program also specifically states that a borrower who lacks such collateral and is otherwise creditworthy should not be turned down due to the lack of collateral.  Therefore, a business with only 4 of the “5 C’s” noted above (i.e., lacking collateral coverage for the loan) can still obtain the needed financing.  For those with little or no real estate to pledge, it is important to find a lender who is skilled at and comfortable with relying on the financial strength of the business for repayment.  Lenders without M&A financing expertise will default to a real estate mindset. For acquisitions, business buyers will need to find lenders with experience in cash flow and goodwill analysis.

Myth:  I can only borrow one time from the SBA

The SBA does not restrict the number of loans to a given business or borrower.  The limit is $5 million in loans outstanding to any guarantor at any given time.  If the limit of $5 million per guarantor outstanding is not exceeded, a borrower can use a loan to acquire a business, come back for working capital or real estate loan to continue expanding that business, and eventually expand by additional acquisition. Experienced M&A SBA lenders will be interested in your roll-up strategy.

See why small business buyers make Live Oak their business acquisition partner.  Over $2.2B in SBA Acquisition loans made since 2008.

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