If you’ve been browsing through businesses for sale, you might have seen the term “Lender Pre-Qualified” on some of the listings, and that is a very positive sign for a buyer. It means that an SBA lender has looked at the business’s financials and based on what they’ve seen, they are willing to lend on it. For sellers who are listing their businesses for sale, it’s important to understand how vital financing is to getting the business sold. To ensure that we know right from the start if a business will qualify for an SBA acquisition loan, we engage in the process of getting the listing “Pre-Qualified.”
Lender Pre-Qualification Process
When we are preparing a new business listing, before it is marketed to the public, we send the business information and financials to multiple SBA lenders that we regularly work with. These are the top lenders, who have a reputation for excellent service, who can get the deal done. The lenders will each do their individual evaluation of the listing, and they will crunch the numbers to see if it is a viable business for an acquisition loan. If it is, then the lender will offer a Pre-Qualification Letter indicating the amount they would be willing to loan, the amount that the buyer would need to put down, the percentage rate etc. Every bank is extremely different in their lending rules, while taking into account the SBA requirements as well, and that’s why it’s important to ask multiple lenders for a Pre-Qualification on the same business. We will then provide these Pre-Qualification Letters when we send the Confidential Business Review to prospective buyers (after they have filled out the proper non-disclosure and questionnaire documents of course).
What Lender Pre-Qualified Means
When a business gets Pre-Qualified by a lender, it means that the lender has looked through the financials of the business, they have taken a new owner’s salary into account, as well as the debt coverage, and they are confident that the loan will be possible. It is in no way a guarantee of lending, as there is a second component of the SBA loan equation, and that’s a qualified buyer. If a business listing is Lender Pre-Qualified, then it usually means that the asking price is in-line with the owner benefit, and the financials are strong enough to support lending.
Why a Pre-Qualification Is Important
For a seller, having Lender Pre-Qualification gives them a much greater chance of selling. About 60% of our business sales are done using SBA financing, so it’s a good advantage to have in the marketplace. It’s also a great sign for a buyer, and it should give buyers confidence that the numbers make sense…at least according to the bank. Often when business listings are denied a Pre-Qualification, in our experience, it can be because the business is operating with too much un-reported cash, or the asking price is too high to be supported by the current and past owner benefit that the business is producing. If a lender feels that a business might be borderline or the financials aren’t as strong as they’d like them to be, they will sometimes ask the seller to contribute 10% to the down payment, in the form of seller financing, to get the deal done. So, don’t be surprised if that scenario does come up.
Can a Buyer Get Pre-Qualified?
There is no “official” buyer pre-qualification with an SBA loan. In today’s competitive landscape, sellers are often requesting that buyers who will be borrowing speak with the SBA lender of their choice before making an offer. A lender will have an initial conversation with a buyer to make sure that they have the basic qualifications they are looking for, and that there are no serious red flags that pop up. A lender cannot guarantee that a buyer will qualify for the loan at this point, they can just give their opinion or best guess, based on the information provided by the buyer. Usually if a lender gives the buyer a thumbs-up on one of these calls, then that should be a good enough indication that the buyer is worth going through the loan application process with. The loan application and approval are part of a business sale process, and the buyer doesn’t actually apply for the loan until after a purchase contract has been executed. So, we won’t know if the loan will actually get approved until the Loan Commitment comes through, which is usually 30-60 days after contract execution.
If we’ve got a ready, willing, and able buyer, and the business listing has been Lender Pre-Qualified, then hopefully it is a recipe for a successful business sale. We do everything we can up-front to give both buyer and seller the best chance to get the deal financed, and we very much appreciate all of our lender partners, who work so hard to provide us with those Lender Pre-Qualifications for the listings at Green &Co. If you have questions about financing or would like to speak with a reputable lender, then we can certainly connect you with a great lender who can help.