How to overcome lack of experience to secure an SBA loan

Hi all. I’d like to follow up on my post “Challenges facing searchers in SBA financing” to offer some solutions for folks without industry experience seeking larger ($3M+) SBA loans.

Here’s the TLDR of that post: Many searchers face challenges with limited liquidity and lack of relevant experience, which limits SBA financing options. Getting your foot in the door with a smaller "starter business" can help build experience and liquidity, making larger acquisitions more attainable. I took this approach myself by buying a laundromat, running it successfully, and selling it for a profit, which has now prepared me for a larger acquisition in the future.

I still advocate for the starter business approach. You can take the path I did and exit with a profit, or expand through acquisition. Once you’ve successfully operated a business for at least a year, you can qualify for 100% SBA financing to buy another business in the same industry. This approach will allow you to grow with your business, and may actually end up being a more efficient path to owning a larger size operation. If you continue shooting for something that’s unrealistic, you could spend years spinning your wheels, caught up in deals that don’t end up panning out because you can’t secure financing.

However, if for whatever reason you do want to pursue a larger size deal right out the gate, here are some things to keep in mind based on my experience as an SBA loan broker.

1. Most lenders do not see having investors in and of itself as an added benefit to your deal. When I ask inexperienced searchers how they plan to mitigate their lack of experience, I will often hear that they are going to bring on investors who know the industry. This isn’t going to cut it. From the lender’s perspective, these investors may not be incentivized enough to get down into the weeds with you. They may just want their money back in 5 years.

2. Similarly, lenders do not tend to find seller notes a compelling way to make up for your lack of experience. Unless the note is of a very meaningful amount, the seller may decide to just cut their losses when the going gets tough and leave you with the pieces (and the PG).

3. Here are the two things that lenders DO find compelling: retained equity & personal guarantees. If you can get the seller to retain at least 10%, or get the seller or an experienced investor to PG with you, now you’ve got a lender interested and have a good chance of getting a deal done.

Remember, a lender doesn’t care how good the numbers look or how sophisticated your spreadsheet is if they don’t have confidence in YOU and your plan to operate the company. They don’t want to issue a bad loan and certainly don’t want to face a clawback if you end up failing.

I hope this was helpful. If you’d like to discuss a particular deal you’re working on, feel free to reach out. redacted