SBA makes it easier for small businesses to get loans by reducing the risk for lenders and making capital more accessible to them. The 7(a) loan program, SBA’s most common, is a group of SBA loans which guarantee portions of the total amount, cap interest rates, and limit fees. This loan program is a great option for buyers looking to finance the purchase of an accounting practice.
SBA 7(a) program lenders fall Into two categories:
1) Standard submission, which mandates that the SBA review the loan prior to approval by the SBA lender. This process essentially requires the loan to be underwritten twice, once by the lender and again by the SBA.
2) The Preferred Lender Program, which allows the partner lender to underwrite the loan without sending it to the SBA for a second approval.
The Preferred Lender Program approval process is more efficient and faster than standard submission. Thus, it is best to seek out a Preferred Lender. Accounting Firm Sold recommends talking with more than one SBA Preferred Lender because significant differences exist In underwriting programs among SBA lenders. Some lenders impose more stringent standards than the SBA program dictates. This can occur because these lenders have underwritten very few, if any, CPA practice acquisition loans where the buyer is buying an income stream from the client base, and are unfamiliar with the Accounting Profession in general.
The SBA has a number of requirements and terms for its 7(a) loans. Here are some important points to consider if you decide to pursue an SBA loan:
- SBA loans require a full personal guarantee from anyone who proposes to own 20% or more of the business.
- If an SBA loan presents a collateral shortfall, also known as financing intangible assets, 20%+ proposed owner(s) must pledge any available equity in personal real estate owned to shore up the collateral shortfall. If this pledge is required, and the 20%+ proposed owner(s) are married, the spouse(s) will need to provide a limited personal guarantee specific to the subordinate lien on the personal real estate owned.
- 20%+ proposed owner(s) must provide either a whole or term life insurance policy equal to the SBA loan amount and/or uncollateralized portion of the loan with a lender collateral assignment on the policy prior to loan closing.
- The minimum credit score for SBA loans varies by lender. Some lenders accept credit scores in the low- to mid-600s; others require much higher credit scores.
- SBA 7(a) policy now requires a minimum equity injection of 10% of the “total price” of the transaction. This is typically in the form of a cash down payment from the buyer.
Accounting Firm Sold has preferred status with SBA Banks that specialize in loans for accounting practice acquisitions. Our relationships with the country’s leading Preferred Lenders streamlines the process and facilitates a quicker closing for the buyers and sellers than using the buyer’s local bank. Because this network of banks understands that Tax and Accounting practices (all cash flow with few assets) are different from most businesses, the result is fewer irrelevant/redundant questions from underwriters and less frustration for the buyer and seller. The Preferred Lender also orders a third-party valuation, ensuring the purchase price is fair for the buyer and seller, and will make working capital available if needed between closing and the coming tax season revenue stream, which means closings can take place mid-year instead of waiting for December. With our experience at AFS and our Preferred Lenders’ relationships, tough deals (buyers with weaker credit or low cash infusions) get done when traditional banks walk away.
SBA Loans can take a little longer to process than conventional loans. Expect 45-60 days on average, from application to closing.
If you’d like to learn more about the process, or receive a referral to one of our specialized, preferred SBA lenders, simply contact Accounting Firm Sold and ask for a Preferred SBA Bank Lender referral.