SBA Loan with No Money Down: A Detailed Review of the SBA Expansion Loan Process.

With the world of entrepreneurship through acquisition (ETA), we have all seen TikToks and Instagram Stories telling you how to get a business loan with no money down. Is that true? Can you really obtain an SBA loan, to buy a business, with no money down? The short answer is yes, but of course there's caveats.

What is an SBA Loan?

First and foremost, let's clarify what an SBA loan actually is. The Small Business Administration (SBA) offers loans to small businesses with the aim of helping them grow and succeed. These loans are guaranteed by the government, making them more accessible to small business owners who may not qualify for traditional bank loans.

There are two main types of loans the SBA provides guarantees for; the 7(a) program and the 504 loan program. See 13 CFR § 120.2. There are additional loan programs available through the Small Business Administration, but for the purposes of this article, we will focus on the former - SBA 7(a) for loans over $500,000.

An SBA 7(a) loan is a financial product offered by the SBA that is designed to assist small businesses in securing funding for a variety of purposes. This type of loan is particularly popular due to its flexibility, as it can be used for numerous business-related expenses, including but not limited to purchasing equipment, acquiring real estate, refinancing existing debt, and funding working capital needs. The SBA 7(a) loan program is one of the most widely used loan programs in the United States, providing businesses with access to capital that they might otherwise struggle to obtain through traditional lending channels.

The SBA does not directly lend money; instead, it guarantees a portion of the loan, which reduces the risk for lenders and encourages them to provide financing to small businesses. This guarantee can range from 75% to 85%, depending on the loan amount, which means that lenders are more willing to approve loans for businesses that may not have extensive credit histories or substantial collateral. The maximum loan amount for an SBA 7(a) loan is currently set at $5 million, making it a viable option for a wide range of business needs. Most notably, the typical rule of thumb is that 10% of the package price is required for a down payment on an SBA loan - but as we'll learn, that's not always the case.

Since it is the lending institution which provides the funds, and the Federal Government agreeing to cover the loan if the borrower defaults, each bank has its own requirements, and thus its standards ultimately determine your loan eligibility.

What is an SBA Expansion Loan?

The SBA loan guidelines are found in the Code of Federal Regulations; 13 CFR § 120.1 et al. To further expand upon the Code, and in all reality to confuse things more, lenders look to the SBA Standard Operating Procedure 50 10 7.1 (effective date of November 15, 2023). Section B Chapter 1(C)(2)(b)(i)(a)(ii), page 111, states “[w]hen an existing business starts or acquires a business that is in the same 6-digit NAICS code with identical ownership and in the same geographic area as the acquiring entity and they are co-borrowers, SBA considers this to be a business expansion, and SBA will not require a minimum equity injection. Emphasis added.

Breaking it down into plain English, as much as possible, in order to qualify for the expansion loan you will need:

1. An existing business that starts or acquires a business;

2. In the same NAICS code;

3. With identical ownership;

4. In the same geographic area; and

5. Target entity and acquiring entity are co-borrowers.

Here is the best part, the terms "existing business" and "same geographic area" are not defined and therefore up to immense interpretation. This is where the lender you choose will have its own interpretations and requirements before lending, so let's try to dive into these two terms and understand their meanings as written.

What is an Existing Business under the SBA?

When doing a simple google search or even speaking to a lender, you may hear an "existing business" is defined as a business that has been in operation for more than 2 years at the time the loan is approved. That is just incorrect. It is correct, the applicant for an SBA 7(a) loan must be an existing business. See Section A Chapter 1(E)(2)(b), but the term existing business is not defined in 13 CFR § 120.1 or the SBA Standard Operating Procedure 50 10 7.1. Any lender or Google search telling you the business has to be in operation for 2 years is misinformed or it's an internal bank policy. The individual giving you this advice is actually conflating a different requirement under the financial analysis of repayment ability section of the SOP. See Section B Chapter 1(C)(2)(a)(ii)(c)(i).

The term existing business is referenced in the SOP definition of New Business, “[a] business that has been in operations for 2 years or less at the time the loan is approved. A business that has been in operation for more than 2 years at the time the loan is approved may be considered a New Business if it is a change of ownership that will result in new, unproven ownership/management and increased debt unrelated to business operations. If there is a change of ownership, the CDC must review the management and level of debt and make a determination whether an additional Borrower’s contribution of 5% is necessary. Operations are deemed to begin when the business begins generating revenue from its intended operations. When an existing business starts or acquires a business that is in the same 6 digit NAICS code with identical ownership and in the same geographic area as the acquiring entity and they are co-borrowers, SBA considers this to be a business expansion and not a new business. See Appendix 3: Definitions.

Conversely, when an existing business buys another entity with the same NAICS code, it is not considered a new business and instead an expansion loan since both the acquirer and target entity are co-borrowers. So a New Business is a business that has been in operations for less than 2 years old or any change of ownership, and the acquisition we are addressing here are full changes in ownership. Business operations start at the time the business generates revenue from its intended operations.

With this in mind, wouldn't a business that incorporated 6 months prior and have sales to show be considered eligible for a 7(a) expansion loan? I could argue yes, but this is where the lender you choose and its internal policies come into play.

What is Geographic Area under the SBA?

The term geographic area is not defined, and is referenced half has as many times in the SOP than the term existing business, so we're already starting with an uphill battle to determine the meaning. To make it worse, the majority of those references are pertaining to the lender and its geographic area. As it pertains to Section B Chapter 1(C)(2)(b)(i)(a)(ii) of the SOP, it is clear the SBA is referencing the geographic area to the acquiring entity, and the CFR falls to the same failure. Again, this is where your choice in lender comes into play as to your eligablility.

The SBA is designated with regional and district offices, so is the georgraphic area the area in which that SBA regional or district office is located? So far, I have been unable to find a lender with this interpretation. I have had lenders state its interpretation in geographic area is the same city your current business is located. I have also dealt with a lender who interpreted the geographic area as strickly the same NAICS code - completely disregarding the location requirement in its entirety.

So to answer the question of what is geographic area, we don't know - it depends on your lender. If you have a business plan which defines your businesses geographic area, and you're able to find an understanding lender, you can define the term yourself. We have personally assisted in obtaining an expansion loan for a North Carolina business to acquire a Florida business because it was defined in the acquiring entities business plan as focusing its operations within the Southeast Region of the United States.

Now that we've covered the background, let's get to the real reason you're reading this Article - the 100% financing.

Equity Requirements under an Expansion Loan

If you're able to find a lender to offer you an expansion loan, congratulations, now we geting into the all important question, "how much is the downpayment?" Under SOP Section B Chapter 1(C)(2)(b), if you aquire an entity within the same NAICS code and geographic area, "[the] SBA considers this to be a business expansion, and SBA will NOT require a minimum equity injection."

Stated again and more plainly, if you meet the requirements above and find a great lender, you can obtain financing for a business acquisition with no money down. Think it's too good to be true? We did as well, until we did it! Choosing a lender that can take you down the road to a 100% financed acquisition is the key. If you have any questions or need assistance with your SBA 7(a) loan contact Howard Law for your legal and M&A advisory assistance.