Lenders (banks and credit unions) will not loan money for the initial purchase of a business in Florida, unless it qualifies for a SBA loan. Period!
There are several options available for buyers to finance a business.
- SBA (Small Business Administration) financing
- Seller financing
- Buyers can borrow against their 401k/IRA plans
- 2nd mortgage against home equity
I always recommend a new buyer initially look only at SBA pre-qualified businesses for sale. It increases your buying power. For a buyer, if you’re qualified, an SBA loan requires only a maximum 25% down payment and in some cases only 15%. It gives you leverage with the funds you have to invest. To qualify for a SBA loan you need good credit. If your credit is blemished, seller financing is still a good option. A SBA guaranteed loan or seller financing is by far the best way to buy a business with minimal down.
The SBA loan process can be lengthy and complex. The SBA will require that you are qualified before the process can start. I recommend Jack Postregna, with Stearns Bank who can quickly determine whether you qualify and help you apply for the loan. if you’re a Veteran – be sure to mention it – Stearns has a special program for Veterans.
Jack Postregna 941-328-6920
SBA will look at both the business and the buyer:
- Business must qualify from a review of its financials by the SBA.
- Buyer must have good credit and put a 25% down payment
Businesses in Florida that qualify with good books and records and will sell for between $250k – $5 million can usually get SBA ( Small Business Administration) financing.
As a buyers’ broker I can help you find a business that has already qualified for a SBA loan.
That’s very important because:
A pre-qualified business means the SBA has already reviewed the businesses’ financials and they have indicated they will loan up to 75% of the sale price to a qualified buyer.
The SBA offers a variety of loans through its 7(a) Guaranty Program. These loans, provided by a bank, and guaranteed by the SBA are designed to help buyers get the money they need to buy a business. There are a dozen different programs – each tailored for a different specialized need.
To be eligible for any of them- you must meet the following qualifications:
- Buyer must put at least 25% down (only 15% if seller will hold note for 10%)
- Buyer may have to allow 2nd mortgage on their home
- Buyer must have good credit
- Buyer must not have a felony conviction
Even by guaranteeing the loan, the SBA will occasionally require the seller to finance a portion of the sale.
My goal is to help a buyer buy a business with a greater yearly income. That means in order to leverage a buyer’s funds we need to look at businesses that offer either SBA or seller financing. A lot of seller’s want all cash, but I can usually convince the seller to offer financing. The best way to do that is to make a fair offer contingent on owner financing. It’s hard for a seller, who has been waiting for a cash offer, to turn down an offer contingent on seller financing .
Sellers eventually realize the shocking fact that 80% of all businesses in Florida that are listed for sale under $1 million and don’t qualify for a SBA loan, will require seller financing or it won’t sell. That’s good news for buyers.
Most sellers find that hard to believe, so I offer this analogy:
- What happens when you don’t pay your mortgage? – The lender forecloses on your home
- What happens if you don’t pay your car payment? – The lender repossesses your car
- If a lender loaned money on a pizza store and the owner defaults – what does the bank do with a pizza store?
That’s why seller financing is usually required, unless it’s a cash sale.
A seller is not required to offer seller financing, but it greatly increases the chances of a sale. Seller financing usually requires a down payment of at least 50%. Depending on the price of the business, it’s common for a seller to require both a current credit report and personal financial statement from the buyer. It’s not uncommon for a seller to request a meeting with a buyer who has requested seller financing. If for any reason that meeting does not go well for the seller, he can refuse to finance the sale.
It behooves a buyer to make a good first impression
In over 10 years of selling businesses in Florida, I’ve only seen one default. Buyers making a 50% down payment will not intentionally default on a seller’s note. The risk is minimal for the seller.
Borrow against 401K/IRA plan
It is possible for a buyer to borrow against their 401K/IRA plan in order to purchase a business. The program is called ROBS (Roll Overs as Business Startups) administered by specialized financing firms. Their fees are up to $5000 to set up. The process is very complicated and requires strict compliance with IRS rules to avoid penalties.
Second mortgage on home
This option hasn’t been used much since the real estate melt down in 2008, but if a buyer has sufficient equity in their home, a bank will loan money secured by a 2nd mortgage, to buy a business. The only downside to the buyer is they are risking their home to borrow the funds. The loan is called a HELOC – (Home Equity Line of Credit). Banks will usually require an appraisal on the home to approve the loan. Fortunately in today’s competitive marketplace, some banks in Florida will waive the appraisal fee ($350+).
As your broker I will help you leverage your money to get the best deal possible.