Deal Structure Is Paramount In SBA Loans

By Peter Seigel

Most buyers and sellers of businesses do not realize how important deal structure and loan presentation (deal package) is to the financing process. Components like down payment, small owner notes (sometimes), purchase price, and the way it is presented to a lender all makes the difference whether a loan is approved or not!

Most lenders consider approximately 32 different factors when considering a business purchase loan for approval, some of them are:

  1. Is the business overpriced? If it is the lender will either kill the deal or have the owner carry back a bigger note or have the borrower put more down. Most owners tend to overprice their business – it pays to have a 3rd party do a valuation before it goes on the market. This Valuation/Report can then be presented to both potential business buyers and to lenders for financing.
  2. The deal must be structured correctly so that debt service of the loan can easily be covered (all lenders utilize different ratios for this) with provable (lender friendly) adjusted net income or cash flow from the business.
  3. Owners must be willing sometimes to take back a small note to get a deal done, sometimes on a standby basis meaning they may get interest only for 2 years then a balloon payment etc. All lenders vary on this.
  4. Buyers must demonstrate they have knowledge of the industry they are buying into or working skill sets that can transfer easily over to the business they are purchasing. Purchasing a franchise is different since buyers usually get extensive training from the franchisor.
  5. Be flexible in your deal structure knowing that when you turn a package into a lender they may want to make changes to it to get it done.
  6. Putting up personal real estate collateral on a deal always helps and sometimes mitigates lower credit scores, work experience that isn’t direct, or other deal factors that can negate a loan.

Perfect loan presentation (for business purchases) and filling out all appropriate forms correctly the first time saves both time and possible the loan with most lenders – that is why many borrowers, business brokers, and agents utilize the services of an SBA lender placement company to secure business purchase financing.