Using a SBA Loan for Biz Acquisition

[Kaizen502]

I have been reading up on SBA loans for Business acquisitions and it looks very interesting since there are a lot of business that have a high enough monthly cash flow to cover the debt service and would qualify in terms of the Debt Service Coverage Ratio.

I just couldn't get this answered and was wondering if a foreigner with a foreign corporation (equivalent to an LLC) qualifies for an SBA 7(a) loan or would I have to incorporate a business in the USA?

I guess I would have a hard time getting any regular loans with no credit history or physical presence in the States.

Does anyone use SBA loans to acquire businesses in the States and has anyone experiences or knowledge if a foreign entity would qualify for a loan?

 

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[BizyDad]

I have been reading up on SBA loans for Business acquisitions and it looks very interesting since there are a lot of business that have a high enough monthly cash flow to cover the debt service and would qualify in terms of the Debt Service Coverage Ratio.

I just couldn't get this answered and was wondering if a foreigner with a foreign corporation (equivalent to an LLC) qualifies for an SBA 7(a) loan or would I have to incorporate a business in the USA?

I guess I would have a hard time getting any regular loans with no credit history or physical presence in the States.

Does anyone use SBA loans to acquire businesses in the States and has anyone experiences or knowledge if a foreign entity would qualify for a loan?

Must be at least 51% owned by a citizen or green card holder to qualify for SBA loans.

And like you said, there needs to be a credit check on all owners over a certain percentage. With the right partner you might be able to overcome that much at least.

But even with these requirements, most every bank will want to see you have a track record of success running that exact type of business also. Here in the States.

 

[Johnny boy]

You have mountains of paperwork for SBA business acquisitions. A guy I know is buying a service business with an SBA loan and it's taking half a year.

 

[WJK]

And they attached EVERYTHING that you own. If you default, they are relentlessly. Know what you getting yourself into.

 

[foxedtail]

And they attached EVERYTHING that you own. If you default, they are relentlessly. Know what you getting yourself into.

I would recommend working with a qualified commercial broker to find you a Preferred Lender for SBA loans. Preferred lenders can cut a lot of the red tape, underwrite faster and make quicker credit decisions. It is true that the documentation requirements are extensive: going back to 3 years of business and 3 years personal tax returns along with other required documentation. I believe a SBA 7a can do startups, however I'm sure they will look for industry experience as well. SBA 7a is a non-recourse loan - so the lender will only liquidate business assets that are collaterized. I'm not certain about Foreign Entities but certainly can find out if needed.

 

[WJK]

I would recommend working with a qualified commercial broker to find you a Preferred Lender for SBA loans. Preferred lenders can cut a lot of the red tape, underwrite faster and make quicker credit decisions. It is true that the documentation requirements are extensive: going back to 3 years of business and 3 years personal tax returns along with other required documentation. I believe a SBA 7a can do startups, however I'm sure they will look for industry experience as well. SBA 7a is a non-recourse loan - so the lender will only liquidate business assets that are collaterized. I'm not certain about Foreign Entities but certainly can find out if needed.

But, I have seen them collateralize everything that the borrower owns -- especially for start-ups. Maybe you know something different from what I have seen.

 

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[foxedtail]

But, I have seen them collateralize everything that the borrower owns -- especially for start-ups. Maybe you know something different from what I have seen.

Depending on the type of SBA loan, the SBA / Federal Government will guarantee between 50-85% of the loan. This is what makes the loan less risky to the lender. If the business assets don't cover the collateral, then I imagine you would need to use a personal guarantee. Sometimes a lender may require a Personal Guarantee regardless, however this is a requirement by the lender, not a SBA requirement. The motivation is that the borrower would be less likely to abandon the debt if they have the personal guarantee.

I think the important thing in all of this is that, SBA lending is a valuable source of funding, especially since they come with lower rates and longer terms. Doing that extra legwork upfront makes it worthwhile. I wouldn't be too quick to overlook it.

 

[WJK]

Depending on the type of SBA loan, the SBA / Federal Government will guarantee between 50-85% of the loan. This is what makes the loan less risky to the lender. If the business assets don't cover the collateral, then I imagine you would need to use a personal guarantee. Sometimes a lender may require a Personal Guarantee regardless, however this is a requirement by the lender, not a SBA requirement. The motivation is that the borrower would be less likely to abandon the debt if they have the personal guarantee.

I think the important thing in all of this is that, SBA lending is a valuable source of funding, especially since they come with lower rates and longer terms. Doing that extra legwork upfront makes it worthwhile. I wouldn't be too quick to overlook it.

I'm not overlooking it. I'm stating the risks that I have seen to the borrower. Even the Covid disaster money came with hidden hooks. My understanding is that anything $20,000+ attached to everything that the borrower owned. And it was VERY easy to apply and get approved. Yes, having the money available at a good interest rate is wonderful. My point is to make sure you are ready, able, and willing to pay it back. Over the years, I have seen people lose everything and have to start over again. UG!

 

[foxedtail]

I'm not overlooking it. I'm stating the risks that I have seen to the borrower. Even the C0VlD disaster money came with hidden hooks. My understanding is that anything $20,000+ attached to everything that the borrower owned. And it was VERY easy to apply and get approved. Yes, having the money available at a good interest rate is wonderful. My point is to make sure you are ready, able, and willing to pay it back. Over the years, I have seen people lose everything and have to start over again. UG!

Agreed. As with every loan, you should read the fine print.

 

[WJK]

Agreed. As with every loan, you should read the fine print.

I spent many years doing commercial appraisals for banks. Many were for internal audits. I learned that most commercial loans can be called IF the value of the asset declines.

Example. The bank made an 80% commercial loan on a $100,000 asset -- an $80,000 loan. The market value then goes down to $80,000. To meet the reserves requirement, the bank can only have a loan of $64,000. They send a letter requiring the borrower to pay the loan down to $64,000. ($80,000-$64,0000 = $16,000 principal reduction.)

I tried to tell the apartment owners who were leveraging to hilt before Covid. They didn't believe me. Oh well.

 

[WestCoast]

Doing exactly this now for $4.5M. Hopefully closing in 2-3 weeks.

SBA was only lender I found that could do multi-millions, with 10% down and no equity stake.
(especially on a deal without Real Estate)

It's been.... interesting....

I'm writing a 'Lessons Learned' document about it - mostly to document to myself how I can do better in the future.

But, for some, it's the only option, and very much worth consideration to get a niche business bought.
Private business sale, not on a listing service, with no competition, and a track record of being in the industry. It can make sense. But, it's not a walk in the park I found out.

--
@Kaizen502 PM me if you want more details. I can't share a lot more than this until the deal closes, but, happy to help if you're about to start.

 

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[Guest-5ty5s4]

@WJK i know for a fact that what you say is true.

Commercial bank loans have a LOT of important details that most people miss.

Usually they have personal guarantees, special covenants that must be met, collateral including just about everything, and more.

This is true for big banks - not smaller ones.

 

[WJK]

@WJK i know for a fact that what you say is true.

Commercial bank loans have a LOT of important details that most people miss.

Usually they have personal guarantees, special covenants that must be met, collateral including just about everything, and more.

This is true for big banks - not smaller ones.

Thanks. I did bunches of appraisals over the years for the banks. Many of my friends ended up in bankruptcy court with their hats in their hands. They walked away with nothing left. In the 1990s, those down turns took down the whole Saving and Loan industry and the Thrift industry as well. I know what can happen to the individual investor and the whole industry. History does repeat itself!

 

[biophase]

But, I have seen them collateralize everything that the borrower owns -- especially for start-ups. Maybe you know something different from what I have seen.

They are required to do that. Every home you have is collateral even in they are worth more than the loan.

Types of 7(a) loans | U.S. Small Business Administration

www.sba.gov

“If business fixed assets do not “fully secure” the loan the lender may include trading assets (using 10% of current book value for the calculation), and must take available equity in the personal real estate (residential and investment) of the principals as collateral.”

 

[biophase]

Sometimes a lender may require a Personal Guarantee regardless, however this is a requirement by the lender, not a SBA requirement. The motivation is that the borrower would be less likely to abandon the debt if they have the personal guarantee.

Yes this is a requirement.

Collateral and Credit | The U.S. Small Business Administration | SBA.gov

www.sba.gov

“For all SBA loans, personal guaranties are required from every owner of 20 percent or more of the business, as well as from other individuals who hold key management positions.”

 

[WestCoast]

Doing exactly this now for $4.5M. Hopefully closing in 2-3 weeks.

SBA was only lender I found that could do multi-millions, with 10% down and no equity stake.
(especially on a deal without Real Estate)

It's been.... interesting....

I'm writing a 'Lessons Learned' document about it - mostly to document to myself how I can do better in the future.

Quoting myself here... but... two months after I said 2-3 weeks... , now it's actually 2 weeks to close!

The SBA process has been full of absolutely crazy twists and turns.
I mean, completely unexpected requests.
But, I've complied, or fought a few...

And I'm sure the final two weeks will have more during the closing process.

I still don't know how the story ends... but it's a much longer story than I imagined!

 

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[Ronak]

Do you have a backup lender in your pocket?

 

[WestCoast]

Do you have a backup lender in your pocket?

Negative.

I 'interviewed' a few initially. All underwhelmed me. I picked the one I had a relationship with already.
That was a delay riddled disaster.

That said, no way I could have been into this with two banks at once...
I picked my horse, and we're making it to the finish line (or the glue factory), together at this point.