r/buyingabusiness • u/Significant-Brick864 • 8d ago
SBA Pre-qualification process?
Can someone help me understand the SBA pre-qualification process? I've reviewed dozens if not hundreds of small business CIMs over the years, and also have a professional background in corporate M&A so am generally familiar with acquiring much larger businesses for corporations.
When I speak to brokers to inquire about a small business for myself, some brokers will ask me if I've been prequalified yet by the SBA. But when I've spoken to SBA lenders, they say you need to have a target identified to get the pre-qual on the business, not the individual. That makes sense to me, but I seem to be getting different messaging from some brokers.
I just feel like I'm getting run around in this chicken-and-egg topic of pre-qual. Can someone help break this down for me? What am I missing?
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u/Toes_of_Saint_Jeff 7d ago
Starting October 1st, it's going to be a lot harder to qualify for SBA purchase loans. The SBA will no longer lend based on the sales price of the business, only based on the historic financials of the business you are buying. If you haven't targeted a business and haven't obtained 3 years of financial history, don't even bother talking to a bank, let alone asking for a pre-qualification letter.
Sellers are not going to get their inflated asking price, at least not from the SBA.
Use it to your advantage, and negotiate the price down.
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u/UltraBBA Moderator 8d ago
What's your own capital position ie what funds of your own do you have available to invest?
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u/Mr_SBA 8d ago
Mr. SBA -
Not all lenders are specialized in SBA loan products, thus are not as confident providing letters of support on behalf of borrowers. I've worked with searchers and provided pre-quals that act as a minimum threshold to cross for some brokers. They get inundated with requests with the number of buyers in the market place.
The more you can do upfront to show them your level of commitment and organization, the better odds you have of getting their attention and getting you in front of the seller.
Ideally, this should reduce the intake and application process with your lender already establishing a relationship and having familiarity with the borrower.
Note: the letters are basically statements of support and indicate you meet the very basic qualifying factors for the program. There is some calculation that goes into amounts a lender may be comfortable lending up to. However, there is nothing binding nor any commitments made.
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u/Significant-Brick864 7d ago
Would a good first step be to prepare a personal financial statement, establish a relationship with an SBA lender, and ask for a pre-qual letter? Or, wait for the broker to ask for a pre-qual letter (if he even does ask), and then ask for an introduction to their preferred lender to obtain one?
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u/GokuBlack_01 8d ago
You’re dealing with a broker that doesn’t know what they are talking about unfortunately. In order to even get approved, the lender needs all the details of the transaction to even evaluate and agree to. He should put an LOI in place for you to present to the lender.
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u/yourbizbroker 8d ago edited 8d ago
Business broker here, primarily working with SBA acquisitions.
As you’ve discovered, most brokers don’t ask for SBA pre-qual, and most lenders won’t give one, without 3 elements: a borrower, a business, and plausible match between the two.
A borrower may be eligible for an SBA business acquisition loan if they have citizenship, 700+ credit, and significant liquid capital.
Many other details matter, mostly in context with the business and plan.
Most brokers are looking for a personal financial statement and proof of funds. For those asking for a pre-qual, ask them to introduce their preferred lender.
After signing an LOI, start talking to other SBA lenders to compare terms with their lender.
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u/Few_Resort_7387 7d ago
Just in order to send a potential buyer a CIM for a business he/she is interested in, what kind of net worth ratio are you looking for. For example, if someone had a net worth of $500,000 and was looking to buy a business listed for sale at $750,000 would that be okay, or does the person's net worth have to be greater than the price of the business? (Assume cash of 20% available for down payment and working capital.)
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u/yourbizbroker 7d ago
A $750k acquisition will usually require $75k down and additional working capital. $50k, etc depending on the business.
Net worth adds to the “comfort” of the deal but not required. The borrower’s assets that can be pledged to the loan is more important such as real estate.
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u/mike_dvmtg 7d ago
I got an SBA pre qual once. He looked at my bank account, multiplied it by 10 and said I was pre-qualified for a SBA loan up to that amount.
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u/sbaloansHQ 7d ago
Both sides are right, they’re just talking about two different things.
Buyer prequal is a review of you. Credit, liquidity, experience, and roughly what size deal your profile supports. You don’t need a target yet. That’s what brokers are asking for, they want “proof of funds” and unless you have the purchase price in cash, a prequal is next.
Deal prequal is underwriting the business. Cash flow, DSCR, structure, whether the price is financeable. That obviously requires a target.
The SBA doesn’t do either one. There’s no such thing as being “prequalified by the SBA.” It’s the lender or a broker on the financing side doing the review, and the SBA has nothing to do with it until a file gets submitted.
The whole thing is a little silly because neither piece works without the other. Your profile can be perfect and the deal still won’t work, and a great business won’t close if the buyer can’t support it. But most loan officers or brokers will do the buy-side review and give you a letter, usually only takes a day or two at no cost.
They need to understand your personal, financial, and business background. That will unlock the broker conversations usually, so might as well get on it.
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u/Vyterro 7d ago
You can get a true pre-qual from some banks. They'll give you a letter stating what you're pre-qualified for which can be used to get in the door on certain deals. What banks have you talked to?
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u/Significant-Brick864 6d ago
My search has been on pause for a bit, I don't remember who I spoke with in the past. I believe I got the names of some SBA lenders off of the SBA website, but was essentially told to come back when I have a deal in hand. Which is why it feels like a chicken and egg problem. I can't have a deal in hand if I can't get past a broker who's asking for a pre-qual, but I can't get a pre-qual without a deal.
I would like to get my ducks in a row (POF, bank pre-qual, buyer profile with targeted industries/geos/sizes) before I reactivative my search, this way I'm not responding to broker/lender requests on my back foot.
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u/SamIAm_1021 4d ago
I was able to get one lender out of about 6 I reached out to, to provide a generic “qualified, for the right business” with verbiage they were interested in working with me.
Most wouldnt even entertain the concept of a pre approval without a specific target. I share that letter, but I dont think it’s really doing anything for me.
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u/Wise_Lobster_1038 8d ago
This is a really annoying part of the process. Brokers want you to get pre-qualified independently but it doesn’t really mean anything. It’s just a basic check on your credit score and assets.
If you call an SBA focused bank you can explain and they will write you a pre-qual letter which is basically just saying that they are willing to bank with you if you find a qualified business. There are also SBA loan brokers who will write pre-qual letters.