The U.S. Small Business Administration (SBA) was created in 1953 to assist small businesses with guaranteed loans covering many of the small business needs for most industry types. The 7(a) program is the Small Business Administration’s flagship program and all SBA data on this website is referring to loans under the SBA 7(a)program.

The mission of the Small Business Administration is "to maintain and strengthen the nation's economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters".

Through the SBA 7(a) guaranteed lending program, the SBA guarantees part of the business loan that a SBA approved lender provides. In the case of a loan default, the lender isn’t on the hook for all of the unpaid loan amount. This SBA guarantee results in lenders providing loans to small businesses that they otherwise would not.

See sba.gov

Look at Financing Considerations Early in The Process

If external financing will be required for the advisor acquisition, then the deal must match bank requirements, not the other way around. Acquisition deals can implode in the end when lending due diligence isn’t done in the beginning. If the acquisition deal or structure can't get financed, what’s the point of everything else?

This scenario plays out regularly in the industry: Buyer and seller have already worked out the acquisition deal structure and terms, hired a lawyer to develop the purchase agreement, paid for a business valuation, and set the closing date. Then, after all that time, money, and effort was spent, they look into the financing only to find out that the deal can’t be financed at all, or that it needs to be re-structured in order to comply with the financing option or lender the buying advisor qualifies for and with.

If external financing will be needed for the acquisition deal to close, then external financing becomes one of the most important aspects of the acquisition deal. Buyers getting pre-qualified at the beginning of the process is critical for both buyer and seller.

External financing will heavily influence the acquisition terms and structure. External financing will dictate requirements around loan amount, cash injection requirements, promissory note amount, type and structure, closing timeline, retention provisions, and more.

SBA Standard 7(a) Program loans are backed by an SBA guarantee of 85% for loans up to $150,000 and 75% for loans greater than $150,000. Qualified lenders may be granted delegated authority (PLP) to make eligibility determinations without SBA review. Loans provided typically on 10 year terms with a maximum loan amount of $5 million.

SBA Express Loans are backed by an SBA guarantee of 50 percent, the lender uses its own application and documentation forms and the lender has unilateral credit approval authority as in the PLP Program. This method makes it easier and faster for lenders to provide small business loans of $350,000 or less, with SBA generally providing a loan guarantee to the lender within 24 hours of their request.

SBA Microloan Program was developed to increase the availability of small scale financing and technical assistance to prospective small business borrowers. Loans range from $500 to $50,000.

504 Certified Development Company (CDC) Loan Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. A CDC is a nonprofit corporation set up to contribute to the economic development of its community or region.

Export Working Capital Loans are used to finance export sales - 90% SBA guaranty on a loan up to $5 million.

Equity Injection If Cash Payment

The equity injection can be paid by the borrower in cash, preferably wired to the lender a week or two before the loan closing. The money can come from savings, investments, a Home Equity Line of Credit (HELOC), or as a gift (with a gift letter as proof). Lenders usually require the most recent account statement for verification.

Full Standby Note

The SBA made a big change to the full standby seller note. Now the seller can finance the full ten percent of the equity injection requirement.

No principal or interest can be paid during the first two years standby period.

This option enables the borrower to purchase a business with no money down.

Partial Standby Note

A partial standby is where interest only payments can be made for the first two years but not principal payments.

The seller can finance up to 7.5% in a partial standby note.

The SBA requires 2.5% to come from a source other than the seller.

Adequate cash flow has to support the partial standby option.

It's only the cash flow not the ROI that matters

It's only the cash flow not the ROI that matters

The thinking that cash flow is all that matters is one of the more consequential myths in the industry. Just because a deal cash flows does not automatically mean it should be done, it only means it's a possibility on the table.

If it takes your current practice profits to make the acquisition deal cash flow then the deal doesn't cash flow on its own. If the deal doesn't cash flow on its own and needs your current practice's profits to contribute to the debt service payment then risk and return expectations are different.

Acquisition aggregation cash flow strategies are very different than an advisor who only intends to make only one or two opportunistic acquisitions in their career. Two totally different approaches to cash flow. See ROI box.

Cash down payment is always required

Reality: Most loans we facilitate involved no cash down payment from the borrower. Advisors who have a book of business rarely need cash down payments for acquisitions.

SBA always takes the house as collateral

Reality: Collateral requirements hinge on the borrower's equity in the property and the loan size. If the equity is less than 25% or the loan is under $500,000 then it is not required by the SBA.

Partial equity buy-ins are not eligible for SBA loans

Reality: This is a myth as of October 2023. new rules allow for the partial equity buy-ins. While conventional lending has dominated this lending purpose over the last decade, the SBA's new eligibility rules will cause a larger percentage of these deals to go SBA (with the much easier and flexible equity injection requirements).

Lenders always require some seller financing

Reality: While all lenders would "like" to have a portion of the acquisition in seller financing it isn't typically mandated, is decreasing in frequency and amount, and as long as the LTV requirements are met only are put in place by the seller's request, not the lender.

Valuation firms and M&A brokers don't get bank referral fees

Reality: We view a kickback when the client (you) is unaware of the arrangement and a referral fee when the client is aware. Some of these firms get kickbacks and some get referral fees but all get paid typically a 1% fee from the bank if you use the lender they recommend you use. That is why they recommended them.

Sellers have to receive all bank proceeds at closing

Reality: It's not uncommon for a seller to receive the payment over two or three years (without seller financing) by funding into escrow and distributing on designated future dates.

All SBA lenders handle M&A loans the same

Reality: SBA lenders vary greatly in terms of additional qualifying criteria, preferences, focus, criteria, and policies.

Multiple concurrent acquisition loans with different lenders is typical

Reality: Most lenders file a UCC-1 lien and insist on being in the first position, making concurrent loans from different lenders requires inter-creditor agreements and while it happens, it's not common and a completely case-by-case basis.

The bank approved the acquisition loan so it must be a good deal

Banks fundamentally differ from borrowers and investors in their approach to evaluating deals. While advisors are focusing on return on investment (ROI), banks rely on historical financial data rather than considering the net present value of future cash flows. Even if a bank conducts thorough underwriting and cash flow analysis, believing you will generate enough cash flow to meet your payments, they often disregard compound annual growth rate (CAGR) as a critical factor in their decision-making process, focusing solely on historical performance.

When a bank underwrites an acquisition they are not evaluating directly if this is a good investment, they are evaluating if you have the cash flow to afford it, risk, and require a business valuation to support price.

The bank doesn't need for the practice you're buying to cash flow on its own, they need for your business combined with the business you're purchasing to cash flow. If an advisor wants to acquire a practice that makes no profit but has some other value, the deal could easily cash flow because of combining with your current business. It's a deal that can get done, because it "cash flows", even though it doesn't.

Valuations are only ordered on seller's practice

Business valuations are only imperative for the seller's practice. Reality: When leveraging non-cash assets, both buyer's and seller's practices may need valuation. SBA loans have a buyer valuation for acquisition loans when there isn't a down payment required in part based on the estimated value of the buyer's business. Conventional lenders may require valuations on buyers for loans over $5 million but these polices are based on the lender.

1.75 or 1.50 DSCR is required for an SBA loan

Reality: This was LOB's old DSCR minimum and if LOB is the only SBA lender you work with then you may think their policies are identical to that of the SBA. SBA's minimum DSC is only 1.15 and LOB has dropped their DSCR to 1.50. Each lender has their own DSC minimum which can greatly impact the loan amount approved (a 50% difference in loan dollars qualified for between this 1.15 and 1.75 range).

Interest rate is the primary deciding factor in banks

Reality: It is obviously an important factor but other factors like qualifying criteria, deal structure, down payment requirements, can be more heavily weighted. If in ongoing acquisition mode amortization is much more important than rate. This is because there is not typically a night and day difference between lenders, just between SBA program loans and conventional.

Conventional loans are always better than SBA

Reality: The appropriateness of loan types varies according to the specifics of the borrower's situation and in many cases the opposite can be true. For deals where the borrower doesn't have a book SBA loans are always better from an acquisition equity injection perspective and for borrowers with and without a book this is often the most critical loan component. When buying bigger and especially much bigger SBA may offer the better scenario.

SBA loans can be refinanced readily with another SBA lender

Reality: Inter-lender refinancing of SBA loans is complex and not commonplace. However they are done sometimes, but it's not a typical thing.

Advisors can't qualify for a loan without life insurance

Reality: While this is mostly true with conventional lending to advisors SBA loans can get around this with rejection letter and documented (and acceptable) continuity plans.

Seller financing is always a good thing for the buyer

Reality: When too much is seller financed for too short of a term (for example 50% seller financed over 3 years) then the pressure on cash flow can cause the bank loan side not to qualify. However, when a seller's note term is 7 years or longer, then seller financing is almost always optimal.

The lender will always provide ongoing financing

Reality: Lender policies on additional loans for ongoing acquisitions can differ significantly. Banks who dip their toe in advisor lending may not be excited as you are about finding another great acquisition so soon after the previous one.

I read this in an article or saw it in a big study so it must be true

It may be true but it also may not be true for you. Our industry has so many different nuances, models, and terminologies for the RIA and IBD worlds and often times the distinction isn't clarified. The advice and best practices being used for multi-billion PE funded RIAs or aggregating multiple flippers, isn't always applicable or even recommended for the typical advisor who doesn't have the same resources nor in the same situation.

SBA loans involve more restrictive ongoing covenants than conventional loans

Reality: SBA loans typically require fewer ongoing covenants.

Seller financing is requisite if there is a claw-back provision

Reality: Escrow agreements have increasingly supplanted seller financing for claw-back arrangements.

Equity in the firm being acquired counts towards the SBA's equity injection requirement

Reality: Equity can count but meeting the criteria to qualify that equity is nuanced.

Borrowers directly receive acquisition funds to pay the seller

Reality: Funds are typically wired directly to the seller or held in escrow, not transferred to borrower to then be paid to seller.

Banks wont touch an advisor loan under $250K

Reality: Obtaining smaller loans, even as low as $100K, can be done through LoanBox.

Buyers "should" make a 25%-30% cash down payment on acquisitions

Reality: While M&A broker firms certainly push this and this may be their reality, this is a unicorn in our world. We believe buyers should pay the least amount as possible in a cash down payment. Any cash down payment requirement from a bank is uncommon for advisors with books of businesses.

Live Oak Bank brought SBA lending to the financial services industry

Reality: While LOB was the first to make a concentrated focus on advisor lending (AdvisorBox played a primary role in introducing them) and while LOB deserves all the pats on the back we can muster because they really did change the paradigm in advisor lending, Live Oak was only established in 2013.

Before 2013 there were 225 banks who provided 1,476 funded loans to financial advisors for a $403K average loan amount. While most loans were under $150K (1,241 of the 1,476) there were 22 SBA loans funded to advisors over $1 million prior to LOB becoming LOB. SBA lending and the wealth management industry is a decades old relationship, not a new trend.

Prior bankruptcy is an automatic denial

If you declared bankruptcy in the last three years…it isn’t a myth because it will be nearly impossible to get a lender to sign off on. And, some lenders will simply not lend to anyone with a prior bankruptcy.

But there are lenders who will make exceptions or have scenarios that will allow for lending to previous BK borrowers. Bankruptcy scenarios that can be potentially be worked around:

• If the BK is older than 10 years for some lenders.

• If the BK is older than 7 years for some lenders.

• The reasons behind the BK are important. Was it caused by a nasty divorce? Was there a serious health issue?

In all cases, if you have a prior bankruptcy a detailed letter of explanation will be required and this is something that should be prepared at the very beginning of the process.

Expansion Loans

Business Expansion Loans do not require an equity injection. When an existing business starts or acquires a business that is in the same 6-digit NAICS code with identical ownership and in the same geographic area as the acquiring entity and they are co-borrowers, SBA considers this to be a business expansion and not a new business.

Expansion Acquisition

When an existing business purchases another established business.

There is no down payment requirement for one business purchasing another business if three conditions are met.

1. The target business to purchase is in the same industry

2. The target business to purchase is in the same geographical area as your current business

3. The exact same current ownership structure will be applied to the purchased business.

If all three of these conditions are met then no equity injection is required. If all three conditions are not met, then the ten percent equity injection rules apply.