Small Business SBA Financing
Why is small business SBA financing so important when considering buying a business? How can small business SBA financing help you? Keep reading to find out.
Yesterday as I was working in San Mateo, CA I had a call from a client who asked me for some advice as to what he should do when buying a business. He said he had about 300,000 and wanted to buy a business and he wanted to make about 300,000 a year and he asked, what type of business he should buy to make that happen.
I informed him that a business that makes 300,000 per year will cost a lot more than 300,000. He understood that, but was wondering what types of businesses he should look for that will allow him to grow the business into 300,000 per year. We spent a few minutes discussing the possibilities, when I decided to turn him onto another track.
I told him, especially in the Bay Area, he should focus on first, getting pre-approved for small business SBA financing. Then, only look at businesses that qualify for small business SBA financing. That way he could preserve a lot of his cash for emergencies, growth strategies, and so forth, and he could afford a more expensive business which would in most cases provide a higher net profit. Consider the following example I explained to him.
For simplicity sake, I used a 2X net profit multiplier to explain the difference. With his plan, he could spend 300,000 and buy a business that makes 150,000 per year. Assuming all other things equal, risk, due diligence etc.; with a small business SBA financing loan, he could do the following. Buy a business for 500,000 that nets 250,000 per year. Put 100,000 down, preserving 200,000 cash for emergencies, growth plans, marketing, etc.
Sure, he will have a payment and therefore the business wont net the full 250,000 anymore, but it will net a lot more than the first plan. Also with the preserved capital he can do things to grow the business as well. I think the biggest mistake people make when buying a business is to assume that just because they don’t need SBA financing, they shouldn’t use it when the opposite is true.