Today, we’re discussing the structure of most business acquisition transactions when using SBA financing. If you’re looking to acquire a business, understanding these financing components is critical.

Let’s break it down.

SBA Loan Structure Overview Most SBA-financed business acquisitions involve three key components:

This three-tiered structure is designed to align the interests of all parties involved while ensuring the deal is well-capitalized.

Financing Larger Transactions

For acquisitions exceeding $5 million, additional mechanisms like Pari Passu arrangements may be utilized. In this structure, additional lenders provide funding on equal terms with the SBA loan. This allows buyers to pursue larger opportunities while maintaining similar financial leverage.

Interest Rates and What to ExpectSBA loans are known for their competitive interest rates, which are tied to the Prime Rate. The range typically falls between Prime + 0.75% and Prime + 2.75% for SBA loans above $500,000.

Where you fall within that range depends on two primary factors:

To secure the best terms, it’s essential to present a well-prepared business plan and demonstrate your financial and operational capabilities.

Key Advantages of SBA Financing SBA loans are structured to support buyers in acquiring businesses efficiently. Key benefits include:

Conclusion:SBA financing is an excellent option for structuring business acquisitions, offering flexibility, accessibility, and competitive terms. Whether you’re acquiring a business for $500,000 or over $5 million, understanding these components is vital to your success.

Host Introduction:

In today’s episode, we’ll focus on SBA financing for franchise startups. If you’re thinking about starting your own franchise location, this is the roadmap you need to follow to secure financing and set yourself up for success.

Let’s dive into the process.

Understanding SBA Financing for Franchises

SBA loans are an excellent option for funding franchise startup locations. They provide flexible terms, competitive interest rates, and the ability to finance many of the costs associated with launching a franchise. However, like any business loan, there are steps and upfront costs you need to address before submitting your application.

Steps to Prepare for SBA Loan Submission

To secure SBA financing, you’ll need to follow a series of essential steps:

1. Qualify with the Franchise

Before anything else, you need to ensure you meet the franchise’s qualifications. Most franchises have specific requirements for financial stability, business experience, and operational readiness. It’s critical to get their approval before moving forward.

2. Buy Your Franchise Territory

The next step is to purchase your franchise territory. This formalizes your agreement with the franchisor and lays the groundwork for your startup.

3. Find a Location

Location is key to your franchise’s success. Once you’ve identified a viable site, you can proceed to the next step.

4. Execute a Letter of Intent (LOI)

The LOI is a non-binding agreement that outlines the terms for leasing or purchasing your selected property. It’s an important document that lenders will want to review.

5. Hire an Architect & Apply For Permits

At this stage, you’ll need to engage an architect to prepare detailed drawings and develop a preliminary construction budget. This budget should include all soft costs including permitting fees, materials, labor, and furniture, fixtures, and equipment (FF&E).

Preparing Your Loan Application

Once you’ve completed these steps, your SBA loan application is ready to be submitted to lenders. These items demonstrate to lenders that you have a clear plan and a viable business opportunity, both of which are essential for loan approval.

Important Considerations for Borrowers

It’s important to understand that many of these steps—such as paying for franchise fees, architectural drawings, and initial soft costs—must be completed before you’re guaranteed funding. This means you’ll incur some upfront expenses, which can feel risky.

However, working with a trusted partner like ThinkSBA can make all the difference. We guide you through the process, ensuring that your efforts are focused, your expenses are justified, and your financing is positioned for approval. Our expertise gives you the peace of mind that your hard work will pay off.

Conclusion:

Launching a franchise startup is an exciting venture, but it requires careful preparation and strategic planning to secure SBA financing. By following the steps we’ve outlined and partnering with a trusted advisor like ThinkSBA, you can confidently navigate the process and position yourself for success.

Join Ryan Smith, Principal and Founder of ThinkSBA and Attorney Scott Oliver with Lewis & Kappes as they delve into the intricacies of the SBA loan legal closing process, recent SOP changes, and the crucial role lender legal counsel plays in ensuring lender compliance.

Bruce Marks has made a career out of mastering lower middle market business acquisition financing by leveraging the SBA 7(a) loan program coupled with a Pari Passu conventional loan for loan requests that exceed the SBA's $5 Million borrowing limit.

⁠⁠⁠⁠https://calendly.com/thinksba⁠⁠⁠⁠ - Schedule Call

Working capital has many meanings and definitions depending on the application of funds. For the purpose of this podcast, I will define working capital as capital provided to a business to fund tangible recurring business expenses or capital expenditures.

Working Capital For Growth

As an SBA Loan Broker, I often receive inquiries from SMB owners for working capital to fund the growth of their business. Their definition of working capital is the transfer of funds from the lender's bank account to their bank account without any strings attached. This is not the definition of working capital.

Let's set the record straight.

Banks provide working capital to fund specific uses such as the purchase of equipment, furniture, fixtures, tenant improvements and fixed expenses such as rent, utilities, maintenance, and employee wages.

Therefore, it is important to understand that in preparing your application to submit to SBA lenders, you will need an itemized list of what we call "Use of Proceeds." Just as it implies, the phrase "use of proceeds" simply means identifying the tangible items the funds will be used for by the borrower.

To be crystal clear. When a borrower is requesting working capital for growth, they should not expect the funds to be sent to them without providing a detailed use of proceeds.

Working Capital To Acquire a Business

When applying for an SBA loan to acquire a business, lenders will nearly always provide working capital to sustain the borrower through the transition of the business. This typically includes working capital to pay up to 90 days of fixed expenses and what I refer to as "free working capital," which means the ability to spend the capital without strings attached. This amount of free working capital is normally small compared to the larger amount used for tangible capital expenditures or recurring fixed expenses.

You Are Ready To Apply

Now that you know how to properly prepare your application, you can successfully apply for working capital to grow your existing business or successfully transition a newly acquired business.

If you liked this content, let's connect on social media:

More ThinkSBA Resources

⁠⁠⁠⁠https://calendly.com/thinksba⁠⁠⁠⁠ - Schedule Call

Join Ryan Smith, Principal and Founder of ThinkSBA, as he sits down with John Homan, esteemed SBA Loan Workout Specialist.

If you liked this content, let's connect on social media:

Chapters:

Link to full episode: https://youtu.be/w0S0tgSccTQ?si=BiYYCUf-5GwnUPEw

⁠⁠⁠https://calendly.com/thinksba⁠⁠⁠ - Schedule Call

Ryan Smith, Principal and Founder of ThinkSBA, sits down with Sol Rosenbaum of SR Engineering and Consulting, a seasoned mechanical engineer with over two decades of experience in energy engineering.

Link to full episode: https://youtu.be/c8RpLw9Vo2M?si=dd5TOeUZx2VnxsTl

⁠⁠https://calendly.com/thinksba⁠⁠ - Schedule Call

Join our Host Ryan Smith, Principal and Founder of ThinkSBA, as he interviews Bethany McClellan, President of Rapid Business Plans.

Chapters
0:00 - Introduction

⁠https://calendly.com/thinksba⁠ - Schedule Call

In this episode of the My SBA Loan Pro Podcast Face to Face, Ryan Smith, Principal & founder of ThinkSBA sits down with Fernando Ponce, Business Development Officer at Primary Funding, a non-traditional lending source based in San Diego, California specializing in Purchase Order Financing, Factoring and Asset-Based Lines of Credit.

Learn how non-traditional lending can bridge the gap for B2B businesses who are unable to secure traditional financing due to negative historical cash flow, tightening of debt markets or spontaneous rapid growth.

If you liked this content, let's connect on social media:

00:00 - Introduction

Link to full episode: https://youtu.be/0Y8x32Y6xsM?si=Uj9vSNG1WMkPb20-

⁠https://calendly.com/thinksba - Schedule Call

In this episode of The My SBA Loan Pro Podcast Face to Face Glenn Arnold with Voit Real Estate reveals transition, succession and exit strategies for privately held, family owned business owners who also own the real estate.

Glenn Arnold is a Real Estate Broker who's been representing buyers and sellers of owner occupied real estate for thirty years.

If you liked this content, let's connect on social media:

Chapters

Link to full episode: ⁠https://youtu.be/Cl8776oj91c

More ThinkSBA Resources

⁠⁠https://calendly.com/thinksba⁠ - Schedule Call