What if a Seller has an SBA Loan?

If you used an SBA loan to purchase your business originally or you obtained an SBA loan somewhere along your business’s journey, and you want to sell before the 10 years is up on your loan term, you should be able to sell your business. Selling a business with a current SBA loan is possible, but not without making sure you have approval from your SBA lender beforehand. That is the first and most important component of the sale of a business that has an SBA loan. With your bank’s approval, there are then three different scenarios for selling a business with an SBA loan.


Sell for More than You Owe

When you signed the documents for your original SBA loan, you most likely signed a “security agreement,” where the bank took a security interest in all the assets of the business. That means that the assets of your business are the lender’s collateral on the loan. That’s why, no matter what you are selling your business for, you will need to get your bank’s approval first, before selling. If your business is valued for more than you owe on the loan with the bank, and you are able to sell it for a profit, then you can sell your business and use the proceeds to pay off the loan in full. That would obviously be the best-case scenario for a seller, but what happens in a scenario where that is not the case? 


Sell for Less than You Owe

Perhaps you need or want to sell your business now, but the business is valued at an amount less than the balance on your SBA loan. This is called a short sale. In this case, it is even more important that you obtain your lender’s permission before proceeding with a sale. As mentioned above, the assets of your business are the bank’s collateral on the loan. To sell the business without first obtaining the bank’s permission could be viewed as a fraudulent transfer of assets, and this is not a legal situation you and the buyer of your business will want to be in. With the sale approved by the bank, you will be required to submit 100% of the proceeds to pay down the loan. Then, for the remaining balance, you will either resolve it by using personal funds or other personal resources. If you do not have resources to prevent defaulting on the balance, you may attempt to work with the SBA to negotiate a settlement (called an “Offer in Compromise”). Either way, you need to make sure you are communicating with the bank every step of the way, and that you are honest and transparent with the bank. 


Buyer Assumes the Loan

Another option for selling a business with an SBA loan is for the buyer to assume the loan. SBA loans are fully assumable with SBA approval; however, getting this approval is just as complex and involved as going through the loan process on a new SBA loan. Any borrower attempting to assume an SBA loan will be carefully vetted by the SBA and must meet a lengthy list of requirements. Some of these include: being an SBA-approved borrower under the most recent SBA guidelines, having sufficient financial strength to fully repay the loan, being the primary owner of the business, having equal or better business experience or skills than the current borrower, and the loan assumption not having a negative financial impact on the business. The bottom line is that a buyer assuming the SBA loan of a seller is the equivalent of applying for the loan all over again. So, if a buyer is considering a loan assumption because they are having trouble securing their own financing, this is not a realistic option. They are going to have to be well-qualified with just as much experience in the same industry or relevant business experience as the seller. 


How Much is My Business Worth?

The first step to selling a business with an SBA loan is getting the lender’s approval to sell. The next step would be finding out what your business is worth in today’s market. Obtaining an accurate business valuation will be critical in deciding how to proceed moving forward, and the help of a professional business broker will also prove beneficial, especially during what is certainly a stressful time for you as a business owner. Knowing what your business is worth to a qualified buyer will give you an idea of which scenario above is most likely, and then you will know what to expect. For a no-cost, confidential business valuation, contact us today, and we will be happy to help.