Cash Flow Based SBA Loans With Little or No Collateral

By Peter Seigel

Most borrowers are surprised when they find out there are SBA loans (sometimes multi-million dollar loans) without little or no colateral required to secure the loan. Of course other factors in the loan evaluation process should be involved for this to happen.

More on this below:

  1. The business being purchased needs to have a history of financial stability or growth during the past three years. Same goes for its adjusted net income or cash flow. There should be plenty of coverage to service the debt (i.e. the business should not be overprices and the deal structure should make sense).
  2. Buying the real estate with the business also helps in that purchasing the real estate helps reduce the risk of only buying the business by itself. If you have the chance to purchase the real estate with the business and you have the down payment (10%-15%) for it – it is always better, i.e. the terms, interest rate, and the length of the loan will always be better if there is real estate involved with the business purchase. I always advise clients to purchase the real estate if it is available, and we have never had an unhappy client return upset for doing so!
  3. Your credit needs to be good to excellent and usually north of a 700 credit score.
  4. This type of purchase works well when a partner wants to buy out another partner, or a manager (or managers) wants to buy the business from the owner.
  5. Borrowers need to have either direct industry experience of the business they are buying, be purchasing a franchise, or have provable working skill sets that shows they can not only operate the business successfully buy make it grow in the future. A great way to demonstrate this is to write a short comprehensive business plan (5-8 pages) that outlines your knowledge not only about the business you are purchasing but also about the industry it is in.
  6. A down payment of 20% or more is required and usually the owner needs to take back a note usually on standby basis, depending on the coverage of the debt service by the provable cash flow of the companies tax returns.
  7. New franchise purchases are different in that they do not need any financial past history, but rather the franchise concept is proven and the franchisor provides training to the new buyer.

Very few lenders offer this type of financing because of the risks involved, but if the deal lines up correctly, these type of loans can be done!