Generally an SBA lender is the choice for small business financing, including acquisitions. The US government’s Small Business Administration provides a guarantee to a lender for a portion of the loan, and that makes the loan viable for the lender.
The very best aspect of the SBA business loan (called the SBA 7(a) program), is that it is based on cash flow, not real estate, receivables and hard assets (although these help). It is also relatively simple, and for clean strong businesses the process can be pretty easy. Then again you can go through hell either because the business isn’t clean and strong, or because you picked a lender that doesn’t quite know what they are doing. I just talked to a lender today that had a buyer with a criminal record – apparently that doesn’t help the process either.
A “Preferred SBA” lender is one that can make their own funding decisions rather than having to submit to SBA every time for approval. I much prefer to work with a preferred lender. I’ve seen the risk tables for one of these large lenders, which lists what types of business they like to fund, and what the down payment requirements are. For example, dental and veterinary practices are at the top of the list, and require only a 10% down payment and they will even throw in 10% working capital on top of that (meaning, essentially, no money down). Apparently vets and dentists are very good at staying in business. At the bottom of the list were a couple of franchises that were in trouble, and for those you would probably have a hard time even getting approval from the bank on any terms. That list changes all the time so no point in naming the franchises here.
The lender is still at risk for the un-guaranteed portion of the loan, and thus lenders still require as much collateral and personal guarantees as they can get from the buyer, but if there is enough cash flow (and stable cash flow history), then I’ve seen lenders forego much of that (although some, like personal guarantees, are required by the SBA).
The maximum SBA 7(a) loan is $2 million, but Senator Kerry is introducing legislation at the end of this month (February 2008) that may raise the limit to $3 million. That would help me quite a bit because I happen to sell companies that could use a higher limit.
There is also a SBA loan program for real estate, called the SBA 504 program. It is much more complex and definitely can be a longer process to complete. You can mix and match too. In 2007 we sold a steel fabrication company in which the buyer used a 504 loan for the real estate and a 7(a) for the business.
You also have to qualify as a small business. The SBA has a table that sets the maximum size that a company can be, so it is important to look up your type of company to see what that is. For many businesses it is $6.5 million in sales, but for others it can be $16 million, or even measured in terms of employees – up to 500 employees.