SBA 7(a) In the Mainstreet Market

“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” — Archimedes.

Know why I love entrepreneurs?  Because they punch above their weight, they are the ultimate underdogs. Risking everything they have, overcoming obstacles, serving their customers and communities, and providing opportunity. They are the people who keep our economy vibrant.  Buying a business allows an entrepreneur a head start in the marketplace and a foundation to build on.  However, the cost of purchasing a business can be prohibitive to the average budding entrepreneur.

Buying a business is easier with a little leverage. Without the ability to get a loan, most people would never be able to purchase an established business.  But buying a business with leverage in the form of a loan allows you to gain control of the business asset using a relatively small amount of your own cash. Then the business revenues are used to pay off the debt. The business buys itself in a manner of speaking.  

The trouble is that startups and small businesses in the main street market are traditionally risky investments.  And while entrepreneurs traditionally have a high tolerance for risk…lenders generally do not.

Recognizing that small businesses are the backbone of our economy, President Eisenhower signed the Small Business Act into law on July 30, 1953.  The SBA was created to support small businesses and encourage entrepreneurship. The most popular of the SBA’s lending programs is the SBA 7(a) Loan Program.  This program is a vital resource, but it’s essential to understand its structure and recent updates to leverage it effectively.

SBA: The Guarantor, Not the Lender

The SBA does not directly lend money to businesses. Instead, it acts as a guarantor, backing a significant portion of loans issued by approved lenders. This guarantee reduces the risk for lenders, encouraging them to work with small businesses that might not otherwise qualify for traditional financing. For most 7(a) loans, the SBA guarantees up to 85% for loans of $150,000 or less and up to 75% for loans exceeding that amount. SBA.GOV

While the SBA guarantees a portion of the loan, individual lenders have the discretion to determine their own lending criteria beyond SBA minimums. This means that factors like credit score, collateral, and business history may vary between lenders. If one lender declines your application, don’t be discouraged—another may have different risk tolerances or lending guidelines. Speaking with multiple lenders increases your chances of finding a loan structure that works for your specific situation. By shopping around, you can better position yourself for approval and secure the best possible terms.

Setting the Standards and Caps

While the SBA provides this guarantee, it also establishes minimum standards and maximum interest rates to protect borrowers. Lenders and borrowers can negotiate interest rates, but they must not exceed the SBA’s prescribed maximums. SBA.GOV

Embracing Change: Partial Buyouts Now Eligible (NEW IN 2023)

Historically, the 7(a) program restricted the use of loan proceeds to full ownership transitions. However, recognizing the evolving needs of small businesses, the SBA revised its regulations in 2023 to permit partial changes of ownership. This change allows entrepreneurs to acquire a portion of a business or an owner’s interest, facilitating smoother transitions and providing employees with pathways to ownership. FEDERALREGISTER.GOV

Key Criteria for Partial Buyouts

To ensure these partial buyouts serve the best interests of all parties, the SBA has outlined specific criteria:

  • Business Continuity: The business must demonstrate the ability to continue operations seamlessly post-transaction.
  • Management Experience: The acquiring party should have relevant management experience or a plan to retain existing management to maintain operational stability.
  • Financial Projections: Comprehensive financial projections should indicate the business’s capacity to meet debt obligations and sustain profitability after the ownership change.
  • Use of Proceeds: Loan proceeds must be utilized for sound business purposes, such as purchasing ownership interests, refinancing business debt, or funding working capital.

These criteria are designed to promote responsible lending and borrowing, ensuring that partial buyouts strengthen the business’s foundation rather than introduce undue risk.

Personal Qualifications for SBA Loan Applicants

To qualify for an SBA 7(a) loan, buyers must meet certain personal criteria in addition to business eligibility requirements:

  • Creditworthiness: Borrowers should have a strong personal credit score, typically 650 or higher, to demonstrate financial responsibility.
  • Personal Investment: A borrower must have invested their own time and money into the business, showing a vested interest in its success.
  • Collateral: While SBA loans up to $25,000 do not require collateral, larger loan amounts may necessitate personal or business assets as collateral.
  • Legal Status: Borrowers must be U.S. citizens or lawful permanent residents and should not have any history of defaulting on government loans.
  • Management Experience: The SBA prefers applicants with prior experience in the industry or a well-defined plan to manage the business successfully.

Meeting these personal qualifications increases the likelihood of securing an SBA-backed loan and successfully purchasing a business.

Stay Informed and Seek Guidance

The SBA’s 7(a) Loan Program offers valuable opportunities for small businesses, but navigating its nuances can be daunting. Regularly consult official sources, such as SBA.gov, and engage with experienced SBA-approved lenders.

By understanding the SBA’s role, adhering to established standards, and staying abreast of regulatory changes, you can effectively leverage the 7(a) program to fuel your business’s growth and success.

Sources

  1. U.S. Small Business Administration. “7(a) Loan Program Terms, Conditions & Eligibility.” Available at: https://www.sba.gov/partners/lenders/7a-loan-program/terms-conditions-eligibility
  2. U.S. Small Business Administration. “Types of 7(a) Loans.” Available at: https://www.sba.gov/partners/lenders/7a-loan-program/types-7a-loans
  3. Federal Register. “Affiliation and Lending Criteria for the SBA Business Loan Programs.” Available at: https://www.federalregister.gov/documents/2023/04/10/2023-07173/affiliation-and-lending-criteria-for-the-sba-business-loan-programs