According to Forbes, only about 50% of businesses survive past year five. There are many reasons for this staggering failure rate. But regardless of the cause, it makes lenders skittish about lending to startups or people buying an existing business like an insurance agency.
SBA loans are loans that are designed to expand the opportunities for entrepreneurs who may not otherwise be able to get funding. In most cases, those 50% of businesses who do succeed wouldn’t even have the opportunity to do so without the SBA.
An SBA loan doesn’t come from the SBA directly. Rather it’s a guarantee from the SBA that if you default, they’ll pay back part of the loan. This shared risk makes lending to you more appealing to banks and other institutions.
Because of this, you can get better terms, lower payments, longer payback windows and higher amounts than those for which you might otherwise qualify. Let’s look at how it works.
Types of SBA Loans
The SBA offers a wide variety of loans. Each loan serves a certain purpose. For example a startup or existing business may need a loan for:
- Acquiring real estate of an existing business
- Working capital
- Buying equipment
- Disaster recovery
- Starting a business in an underserved area
Micro-loans (under $50 thousand) in addition to larger loans are available. The SBA.gov website includes many helpful resources that will help you understand what type of loan is right for you.
Who Qualifies for SBA Loans
To consider if you qualify, you should first evaluate what your needs are to determine for which type of loan you should apply. Each loan type will have its own qualifications that will help address the unique situation.
In addition to meeting SBA requirements, you will also need to demonstrate your creditworthiness to the lender. They will be looking at your financials and may also evaluate what you intend to buy to ensure you’re a good credit risk. The SBA and your lender will also want to know that you have “skin in the game.” Many loans, but not all, will require that you’re putting a percentage into your business venture.
Buying an Existing Business with an SBA Loan
The SBA recommends that you consider the following when applying for an SBA loan to buy an existing business like an insurance agency.
Take a close look your financials and the books of the business you’re purchasing. Use this information to determine a reasonable amount to pay for the business. Evaluate how much it will cost to manage the business to be certain that this is a smart investment for you.
The SBA encourages you to be honest with yourself about whether you have the in-house skills to manage this business. If you don’t, how will you acquire these skills in order to run a successful agency? Or should you be buying this specific agency? Maybe another would be a better fit.
Finally, they urge you to make sure you know what you’re buying. What infrastructure is in place? What liabilities, technologies, cash flow, patents, contracts, etc. come along with the deal? Consider everything to make a smart buy decision.
How Do You Apply
You will complete the application process with the SBA. The documents required will be a little different depending on which loan you apply for. They’ll walk you through the process step-by-step.
What Happens If You Default on an SBA Loan
It’s also important to discuss the consequences of defaulting on an SBA loan. There are some pros and cons getting an SBA loan. They do make it easier to get funding but if you default, you now have both the bank and the US government contacting you regarding your unpaid debt.
If you don’t pay back your loan, the bank can legally require you to shut down and liquidate assets to pay back the loan. After this, the loan will be handed back over to the SBA. You will have an opportunity to settle with them, but if you continue to default, they do have the power to garnish wages, without tax refunds, etc.
This is why it’s so important to work with someone who understands the mergers and acquisitions process. We’ll help you evaluate agency purchase decisions and negotiate the right price so that you’re set up for success in your agency buying and management ventures.