Best Practices in Securing a 7A loan

Best Practices in Securing a 7A loan

SBA Financing is a great tool in your toolbelt as you consider acquiring a business, for growth capital, as you scale your company (expansion or rent replacement), as well as to acquire Commercial Owner-Occupied Real Estate and Assets like equipment for your company.

What is the SBA 7a Loan Program?

It is a Premiere loan program offered by the U.S. Small Business Administration that provides greater flexibility in terms and deal structure than conventional financing. It also allows you to preserve your capital for other aspects of the business.

Key terms of an SBA 7(a) loan:

Loan amount: Up to $5 million
Term: 10 years for business acquisition and up to 25 years for commercial real estate
Down payment: As little as 10%, sometimes less.
Interest rate: Negotiable between lender and buyer, but it must be under or equal to the SBA maximum. Often a floating rate that is tied to Prime with an Index added to Prime.
Prepayment: None for loan terms less than 15 years with a floating rate option.
Use of funds: Business acquisitions, Commercial Real Estate purchases, working capital, equipment, or refinancing, or Startups.

If you are planning to buy a business for the first time or expand your existing portfolio, SBA 7(a) is an excellent option.

Qualification Process for an SBA 7(a) Loan

Eligibility is a key factor in the qualification process. The SBA has fairly strict guidelines that lenders must follow. Knowing whether you qualify is the first step. Most business owners do qualify but working with a professional who can quickly identify any concerns is paramount.

The next step is the underwriting process. The focus will be on a few key areas that are listed below. Understanding the process is a plus as you maneuver through the amazing world of SBA financing.

Here’s what you need to know about SBA 7(a) loan requirements:

Credit score: The minimum credit score is typically 680 or above.
Industry experience: Industry experience is very important to Lenders particularly as in the acquisition of an existing business. Having a strong background or transferrable skills will matter. Bringing in a partner/ or leveraging existing key employees to enhance the experience is a great strategy.
Cash flow coverage: Debt Service Coverage Ratio (DSC) varies from bank to bank and may be impacted by cash flow or industry. It is typically at least 1.25x is considered the minimum benchmark for a financially sound acquisition. While the SBA’s current lending guidelines subject to change. It is important to understand how the bank calculates DSC. MFR LLC has the banking expertise to guide you through the process smoothly. A very important component of the underwriting process.
Post Liquidity: Many banks will require at least 10% of the term loan for post liquidity. Having access to liquid funds that provide a working capital cushion post close is also a strategy for success in the transfer of ownership. Stronger borrowers with higher liquidity are more likely to negotiate the best terms for their SBA loan.
Collateral: The SOP (Standard Operating Procedures) for the SBA requires all Banks to secure the 7a with business assets first. If there is a collateral shortfall, they are required to request personal assets to short up the gap. Life Insurance may also be required as well.
Clear background: Buyers should have no record of recent bankruptcies, major credit issues, or tax liens.

What Lenders really are interested in:

1

Does the business cash flow support the debt that they are funding as well as any other debt on a global basis?
2

Do you have the experience and capacity to run the business successfully?

Next month, we will cover the SBA Funding process and timing for SBA 7a loan closings. There are several steps involved in getting to the closing table.

Reach out with any questions at: Arlene@Martinfinancialresources.com