Lesson #3

Welcome to lesson #3 of “Learn How To Buy A Cash-Flowing Business In 5 Days.”

If you missed lesson #2 or want to refer back to it, you can find it here.

In today’s lesson, we'll cover how to finance a deal with little to no money down.

I’m going to show you the most popular way to do this: leveraging the SBA 7(a) loan along with a combination of seller financing, equity investors, and your personal capital.

Let’s get started!

If you haven’t heard of the SBA 7(a) loan before, you’re in for a treat.

The Small Business Administration (SBA) guarantees loans made by banks and other SBA lenders to small businesses, making it easier for buyers to obtain financing to buy an existing and profitable business.

These loans can provide up to $5 million in funding and generally come with reasonable rates with a long amortization usually of up to 10 years.

The SBA requires a certain amount of equity injection from the buyer, typically 10% of the purchase price. That means the SBA loan can cover up to 90% of the purchase price. 

There are also additional requirements, such as making sure you pass a certain debt service coverage ratio (DSCR) to ensure the company’s cash flow can support the debt you take on to buy the business.

To quickly see if a deal you find would pass the sniff test for an SBA loan, bookmark my Quick Deal Analysis Calculator »

I recently interviewed Elyse Gonzalez (VP of SBA Lending at Live Oak Bank, the nation’s top SBA lender by dollar amount) about all things SBA 7(a) loans, covering questions like:

• Would I qualify for a SBA loan?

• What types of businesses qualify for SBA loans?

• When should I engage an SBA lender?

• What does the process look like?

• What should I anticipate loan terms to be?

Watch the interview here or bookmark it for later »

By the way, if you want a referral to Elyse from Live Oak Bank (a preferred SBA lender of mine), I’d be happy to make a personal introduction.

Pretty good, right?

But today I’ll show you how you can bring your equity injection as the buyer down from 10% to 2.5% by taking advantage of a little-known new rule change from the SBA by leveraging a seller note.

You may have heard of a seller note before. A seller note is a loan from a seller to a buyer. A seller note is also referred to as owner financing or seller financing. 

In this scenario, the seller becomes a lender, agreeing to be paid back a portion of the purchase price over a predetermined period, usually with interest. 

Here though, we are specifically going to use a “seller note on standby.” 

The SBA 7(a) will now allow sellers to help finance 7.5% of the purchase as long as the note is on standby for 2 years. This means the seller has to wait 24 months after closing, and the loan must be amortized over the remaining term of the SBA loan with no balloon payments.

For example, a $1 million transaction could look like this:

• SBA 7(a) loan: $900,000 (or 90%)

• Seller financing: $75,000 (or 7.5%)

• Buyer cash injection: $25,000 (or 2.5%)

As you can see, incorporating seller financing is a great way to purchase a much larger business than you could on your own. 

There are other strong reasons to leverage a seller note as well (which I’ll talk about in lesson #4).

Okay, so 2.5% cash injection is great, but how do people buy businesses with ZERO down?

What many people don’t realize is that the SBA allows outside equity structures, like multiple investors, to cover the minimum equity required by the SBA.

Many high-net-worth individuals are looking to invest in these deals (myself included!). 

These folks are looking to beat the average market or real estate return. 

You probably even know some “angel” investors.

But what if you want to buy a business that costs more than $5M?

This is where pari passu loans come in. 

Pari passu is a Latin phrase that means “side by side.”

These loans allow entrepreneurs to secure an SBA loan of up to $5 million and a conventional loan from a bank of up to $4 million. 

This means that you can secure up to $9 million in financing.

Well done! You’ve made it through lesson #3. 

Keep an eye on your inbox tomorrow for lesson #4 (or click here to dive right into it). 

We’ll discuss how to structure a deal.

See you tomorrow!

-Helen Guo
Connect with me on Twitter/X or LinkedIn

P.S. Want me to help you find a business to buy in the next 90 days and handhold you through closing your first deal? Book a call.