Read this before you apply for an SBA loan

If you're considering an SBA loan to buy a business, it’s crucial to understand exactly what you’re signing up for.

I’ve been a part of multiple deals with SBA loans to acquire businesses and helped hundreds of students navigate this process…

And today, I’m sharing everything you need to know that the banks won’t tell you upfront.

The scariest part first

For SBA loans, you personally guarantee the loan.

If you buy a business for $1 million and it fails, you owe that money. The bank can come after your house, car, and 401k.

The good news is, businesses acquired through SBA loans have a 95% success rate after 5 years.

Compare that to startups (which have a 95% failure rate within 5 years), and it’s clear that buying something proven removes a lot of the risk for you.

The bank does their own due diligence too.

If the SBA approves your loan, they’ve validated the business, further increasing your odds of success.

What happens in worst-case scenarios

If the business fails and you can’t make payments, banks try to work with you first. They don’t want to foreclose.

They might restructure the loan, extend terms, or reduce payments temporarily.

If that doesn’t work, they liquidate business assets first, and only after that do they come after you personally.

Most lenders negotiate settlements rather than spend years in court. I’ve seen people settle $500,000 loans for $150,000.

Your credit will drop 100-200 points, but you can recover here with a good strategy after 2-3 years.

All that to say: it’s a setback you can recover from.

Collateral and requirements

For loans under $500,000, the SBA typically doesn’t require your home as collateral. Instead, they take liens on business assets first.

For larger loans, they want additional collateral like your home and retirement accounts. But they rarely foreclose on personal homes, and prefer payment plans or settlements.

You need a 650+ credit score, though I’ve seen approvals as low as 600 with strong assets or co-signers.

Additionally, you’ll need at least $20,000 in liquid capital and 3 years of tax returns, and the down payment is typically 10% - so $50,000 on a $500,000 purchase versus $100,000 for a house.

The process takes 60-90 days with extensive document requests like bank statements and retirement accounts.

You don't always need an SBA loan

This might surprise you, but seller financing can be a better option in many situations!

Sellers often finance 10-50% of deals with no credit check and potentially lower interest rates.

One of my students bought a $125,000 business with $25,000 in seller financing and zero payments for two years. He’s now making over $100,000 per year.

Another good option is private investors, who can provide capital while you run the business, and you split equity however you negotiate.

All this to say…

SBA loans aren’t as scary as you think.

Yes, you’re taking on real risk and responsibility. But you’re also gaining access to an incredible opportunity to own a cash-flowing business.

The key is understanding all your options and structuring deals properly.

If you want to get the best deals I come across…

Just fill out the 2-minute survey below.

When I come across deals I think my subscribers might be interested in, I’ll send them your way:

👉 I want to buy (or passively invest into) a small business

Or if you have a small business you want to sell and you’re looking for buyers, fill out the survey below:

👉 I want to sell my business

Onward,

— Ben Kelly