How to Get SBA Financing to Buy Your First Business

0:01 We are live. All right, this is my first Substack live, so welcome if anybody joins us. I don't know cuz I've never done a Substack before. Today we're going to be talking about how to get SBA financing to buy your first business. But anyways, for for anybody who's joining that doesn't know who my myself, I'm Bo Eckstine. I've been in lending for 28 years. got into the franchise industry about 6 years ago. Real estate background. I did a lot of house flipping in 2009 through 2017, 18, 19, and then kind of got burned out of flipping houses, invested in out of state in rental properties. I was investing in Indiana, but I realized I don't really like that. I really focused more on businesses cuz I figured out that if you really want cash flow, buying single-family rental properties is probably not the first avenue to go.

0:57 Owning a cash-flowing cash-flowing business is. If I could tell my 20-year-old old self and go back in time, I would definitely say, "Look, you should get into a cash-flowing business first and build the cash flow and then invest into real estate for long-term appreciation and wealth growth, right?" But I did things a little bit backwards. Then I got into the business space. Today I'm part owner of a marina and restaurant, and then also part owner of a franchise that does tile and grout restoration and preservation.

1:33 Those are kind of just investments. I have a lending company where we do mostly SBA loan advisory, government guaranteed loans. Hence our topic today, how to get SBA finances to buy your first business. this is on Amazon if anybody wants to get it, but I also created this into a digital course, and I'd be happy to give anybody that's on access to that digital course. just you can shoot me an email bow@boexsteen.com and just say would you please send the digital course and I will give you access to that course absolutely free.

2:10 There's I think 13 or 14 modules. It's a video course. It's in it's hosted in Thinkific. But welcome everybody. Thanks for joining my first official Substack live. It's an honor to be here. It's an honor to be in this podcast studio. I really enjoy coming here. The guy that runs it is super nice and you never know who's going to be at the studio. It's it's right across from the airport here in Las Vegas and there's a lot of professional UFC fighters and and marketing people and you would recognize a lot of people that I you know so I enjoy when I come in I don't know who's going to be here in the other studios.

2:48 And it's fun. And also it's a great way to create professional content and it's a lot easier than doing it in my messy home office. The last 9 years I've really focused on SBA financing. And when I really dove into it I it's it's an industry as far as being able to structure these deals. It's there's no there's no curriculum that teaches you how to do this. It's really you're learning by other bankers and there are some courses. We we actually I co-founded the National Association of SBA loan brokers. And we're now providing education for brokers on how to you know get in this business how to actually get deals closed.

3:27 SBA doesn't make these loans. The the guarantee a portion of the loan based on the loan loan amount. So the banks are encouraged to to make these loans cuz they have a large guarantee. And banks also it's very lucrative for the banks so that's another reason they like making these loans. And so today we're going to mostly talk about the SBA 7A loan. That's like the Swiss Army. It's you can buy real estate with it. You can buy businesses without real estate. It provides working capital, expansion financing, construction financing.

3:59 And then the 504, the SBA 504 is more for just real estate deals. So, you can do you can actually do a 504 with a companion 7A. But, the 7A has its advantages. The 504 sometimes has its its advantages on real estate deals. but today we're going to talk about we'll start the conversation with, you know, buying your your first business. what does that look like? So, whenever you're doing a business acquisition, and if you guys have comments, you can leave leave them in the thread. It's not in front of me right now, but I will go back and I could probably grab them on my phone.

4:38 But, if you if you're looking to buy your first business, let's say it's a business acquisition. So, you're buying an existing business. these are cash flow loans. So, what does that mean? It means what do you need from the seller to see if the thing will pencil out. So, let's say you find a business you're interested in buying and it's a tree trimming business. And the seller wants $1 million for the business. So, what you're going to understand over time is that we're looking at cash flow from a banking perspective. Does it does it debt service? It's called debt service coverage ratio. At this point in time we'd say get the 2023, 2024, and 2025 seller business tax returns.

5:19 A year-to-date profit and loss, a balance sheet, and a SIM, which is a marketing brochure. If you have those or a company website. And give us the terms of the deal that you're working on. It's a million-dollar purchase, acquisition. Then, what we do is we do a cash flow analysis. If the potential loan debt services, we can finance 90% of the total project cost. So, we could finance $900,000 of that acquisition. You, the buyer, would bring in a 10% equity injection as your down payment. So, for a 100 grand, you're buying this million-dollar business. You can also bring an investor partner in, and if he or she owns less than 20%, they don't have to be a guarantor. So, you could bring an investor partner in that way. We see that all the time. So, they might bring the 100 grand in. Or maybe you have an investor that says, "Hey, I'll do 50 grand. I want 10% ownership in the business." Whatever you guys negotiate based on how you guys are factoring different things. The seller can potentially carry back 5% of that 10% equity injection. It has to be on full standby for the term of the loan.

6:21 So, if it's a business acquisition with no real estate, we already know it's going to be a 10-year term. That can accrue interest, but no payments are due per the note. Many business acquisitions have owner seller carry back notes. It's very common in conjunction with SBA. And there's a lot of reasons, too. So, sometimes the seller wants this price, the buyer wants this price. The buyer moves up, but says, "Okay, that you need to carry back a bigger note because the thing's not cash flowing." So, there's ways we structure the notes to make the thing make the business debt service.

6:52 For the illustrations of this, you bring an investor partner in, he or she brings in 100 grand, you can actually close with zero out of pocket. Now, you have to have good credit. You have to have post close liquidity. You have to have transferable experience. But, where in the world can you go buy a million-dollar business with none of your own cash? So, when I really found out about SBA financing and really understood the magic that it can do, and it can really change lives.

7:21 Because if you look at what my early on years where I was like, "Okay, I'm going to buy 20 rental properties, then I can, you know, live off the cash flow." That's a bit of a process and a lot of down payment. You can make one move, one acquisition, and replace your W-2 if you do it correctly. So, that's the power of SBA. You close on this million-dollar tree trimming business, you're running it for 2 years, and it you're absolutely crushing it. You're growing the business, you're hiring people, top line revenue, the the net income are all rising.

7:58 there's another tree trimming business in the next town over, and he he or she wants to retire. Well, now that you got 2 years of experience, and if the business is in the same NAICS code, you can actually acquire that business with up to 100% SBA 7A expansion financing. So, now you acquired the second location, and you're getting it you're taking it over, you're stabilizing it. And now you're like, "Okay, now we have a problem because we have too many trucks, too too much equipment, too much too much staff now.

8:31 and I'm paying lease on these two locations. You can get another SBA 7A or 504. You can do a 7A expansion to get actually 100% percent to buy that building. Or you can potentially do 90% financing with a 504. And there's reasons to do the one or the other, and I've shot a lot of videos on my YouTube channel. I would encourage you to go find it, Investor Financing Podcast, at Investor Financing Podcast, and we do a lot of breakdowns of SBA and franchises and stuff.

9:00 So, now you buy the building with little money, even if you put in 50 grand on the first acquisition or 100 grand, right? You've now bought a second location or second business on a roll up. Now you bought a building, and you're occupying 51% of the space because you don't need all the space. Well, that other As long as you occupy 51% of space, that is good for SBA guidelines. They want you to occupy the real estate.

9:24 The other 49% can actually be leased out. So, maybe that covers a lot of your debt payment. So, you can be very strategic. And And we all know if you own the real estate, and it's an active business, you might be able to get some huge tax write-offs by utilizing cost segregation and accelerated depreciation. So, SBA is a huge wealth-building tool tool, bottom line. Now, let's say that you're not ready to leave corporate. You could buy self-storage facilities that you can manage remote.

10:01 You can buy a boutique motel if you're a short-term rental operator that's eligible for SBA financing. You can buy a gas station. Lots of things, campgrounds, RV parks, a grocery stores, lots of opportunities. And the best part is is maybe you'll find a business that already has good systems and management in place. Although, whenever you take over a business, just realize it's a lot of work, no matter what, even if there's infrastructure in place. Buying a business and the due diligence to buy a business is another class, right? And I have really good advisers that are referral partners of mine who can guide you through the diligence process of what you need to do to make sure the business, you know, I always say first step is analyzing the numbers, does it make sense to look at more? And that's what we do on the SBA kind of debt service cash flow analysis.

10:48 But, there's a lot more due diligence you will do. so, there's a lot of verticals you can go, a lot of different directions you can go. You can have up to $5 million of SBA proceeds in the same industry. We call it a NAICS code. However, they just enabled that you could also have 5 million in SBA 504. And a 504 is a first and second. So, you have a lot of optionality now. And let's just say you did use up your $5 million buying this tree trimming business with no real estate. Now, you want to own another vertical, a a painting company.

11:20 Well, that's a different NAICS code. You can have additional 5 million in a different NAICS code. A lot of SBA people say, "No, you can only have 5 million." No, if it's a different NAICS code, you can to another 5 million of eligibility in that different business class. So, how do you get started, right? Maybe buying a big business is not what you want to start with, and that's why 6 years ago I got into the franchise industry because what I like about franchises, it's a you get systems, SOPs, coaches, marketing, right? and it really is you coming into the system, being coachable.

11:55 First of all, you got to find the right system for you that aligns with your skill sets, time, financial capabilities, etc. But, I like it because it gives you those guardrails you need, right? I think we all need guardrails, especially when we're getting started, right? We don't know what we don't know. There's been an uptick in defaults in SBA loans right now. And a lot of them used to be the smaller loans. What we're finding now is bigger loans seem to be defaulting.

12:23 And the reason are there are these ETA like where they want to do you know, entrepreneurship through acquisition. A lot of these people that went to these, you know, Ivy League schools and went to through these curriculums, on paper, I mean, they're just super intelligent, no doubt about it. But, they've never owned and operated a business. They never work with blue-collar workers. And then, their spreadsheets are a lot different than the reality of running a business. So, I think that's why we're seeing an uptick. Look, running a business, owning a business is not easy. It's not for It's not for everybody. And there are businesses, which I call gateway businesses, like vending, which might be a good stepping stone for some people out there. But, SBA financing really comes down to on an acquisition side, the strength of the cash flow of the business you're buying, and then you. Do you have post-close liquidity? Do you have a 700-plus credit score? Do you have cash flow that supports your your lifestyle from a DTI we or we call it a global cash flow. And then, you might not have exact industry experience, which is completely fine. It's just you want to have some skill sets that transfer to this new business you're running. And we can help you with that component. That's really the meat and potato of it is the stronger the business you find, good strong cash flow, doesn't have any declining revenue, doesn't have a customer concentration problem, the easier it is to finance. And I'll give you some guidelines here on some loan stuff. When loan amounts are over 350,000, SBA guidelines require the bank to look for additional collateral.

13:55 So, if you own a primary residence and you have equity there, they could put a second lien on if your loan amount's over 350. I've done loans where there's guy has guy or girl has no collateral whatsoever, but the business cash flows and they're not buying any collateral with the business. That's perfectly fine. That's called an airball deal. But, be aware if you own a large rental portfolio and they're all in your name and you're buying a $5 million business with no real estate, you're going to have what's called a collateral shortfall, so they'll have to look for additional collateral. So, no one should get penalized by having real estate, in my opinion. I would change that rule because it's not fair that you can do the same loan just cuz this guy doesn't have real estate. Just know that going in. Loan amounts under 350, they don't have to look for additional collateral, but doesn't mean some banks still ask for collateral. The lender matters significantly. Figuring out what lender to go to is the whole art of the deal because you can literally take the same deal.

14:49 Like I just had a deal and it was challenging because it's an expansion, but he doesn't really have two years of cash flow what they look for. So, two banks said, "Nope, we won't do it even with an equity injection." But, I the third bank said, "Yes." So, I just got a loan proposal for this guy. Now, it's not a loan commitment, but the point is it's doable. it was I knew it was a doable deal.

15:11 It's just finding the right fit. And it's not an exact science. I have a really good idea where to bring the deal to, but sometimes it takes a little bit of finagling, greasing the greasing in to get the the, the deal looked at or potentially sometimes the first bank you brought to, they'll, they'll give you some like, look, we can't do it cuz of this. So, when we bring it to the next bank, we make sure we know what we're doing to get it, get it done. What we do as SBA loan brokers, SBA loan advisors, is we have relationships with lots of different banks, credit unions, and non-bank SBA lenders. So, there's a license that you get and we work with mostly, pretty much 99% of the time, we work with PLPs, preferred lenders for the SBA loan program. And that means they underwrite, they do everything, they fund it, the deal never goes to SBA. That's a PLP. If they're a non-delegated SBA lending company, the file actually has to go to SBA for underwriting. Now, 504s are a different story. It gets underwritten bank level and then SBA has a non-profit arm, basically, what we call them CDCs, they underwrite the file with SBA.

16:18 So, it's two underwriting processes for a 504. Generally, if the bank approves it, the CDC is going to approve it. Sometimes, if it's a really challenging deal, we'll bring it to the CDC first and then find the bank after. Maybe 10 months ago, I closed a a very large transaction. It was a $10 million acquisition. So, you're capped at 5 million, right, on an SBA 7A loan. You're able to bring in a conventional loan alongside of it, both in senior position.

16:45 Same bank made the loan and we did two and a half, 2.3, 2.4, I can't remember exactly, with the 5 million SBA loan, it's called pari passu. and then we had the seller carry back about two, a little over 2 million, and the borrower came in with a million, 700,000 of that was from an investor partner and then he himself brought in 300 grand. That business does about $4 million net cash flow per year. So, 300 grand out of pocket. Best part, when he closed the transaction, we had 800 grand in working capital. He got wired in 800 grand into his bank account.

17:22 So, to me, that was a what I call a grand slam. He seems to be doing very well, at least his bank deposits seem to represent that. So, the point is is we might not be this guy that's kind of a grand slam deal, but how do what do we do? Now, let me just tell you, hey Bo, look, I've got good credit, I've got a decent W-2 job, I've got $30,000 liquid. I can't do any of this.

17:48 Look, there's franchise startups that you can get in the game, total project cost, franchise fee, working capital, 100 to 175,000. So, let's just take 150,000. We have banks that will fund 90% on a franchise startup if it's a an approved franchise. So, I get you in the game for 15 grand out of pocket. Now, remember, you got to be a good operator. You got to get in there, be coachable, follow the systems, and grow the business.

18:13 But, there's pathways to people getting into business for 10, 12, 15,000 out of pocket. You don't need hundreds of thousands of dollars. Our company's mission is to help 1 million aspiring entrepreneurs become successful business owners over the next 10 years. And obviously, that's just maybe somebody listening to a Substack live or YouTube, right? We're definitely going to do it cuz we've got a couple million views already. So, I would say I don't know if I can classify I've helped all those people, but we'll figure it out. But, anyways, that's our mission.

18:42 That's why I do SBA loans primarily, and we have a franchise consulting company cuz I when I started financing a lot of these franchises, I didn't even know at the time there was independent franchise consultants. And I'm like, wow, I'd love to get in that business. And sure enough, I set up a brokerage and opened a franchise consulting practice. Obviously, got trained by the right association. And we play matchmaker, essentially. We give you business assessments and help you figure out what's unique to you. I use a combination I like I like giving people a Kolbe A assessment and I also use we use in our industry use something called the Zoracal assessment it's called a Spot On.

19:27 and then obviously getting to know you over Zoom is usually how we meet and then we we build a thesis. You know, what what's the what's your DNA tell us that would be a good business model for you? And a lot of times you have no idea what type of business you want to own. We help you go through a process of starting a little bit wide, narrowing it down, narrowing it down, narrowing down to hopefully finding you a business.

19:52 Or at the worst case scenario, you got a good education and you said, "Look Bo, I don't really want to own a business. I'm going to keep investing in real estate single family homes or whatever the story is." But SBA financing can if you understand it and utilize it can change all of your lives. Now yeah, sure you have to sign a personal guarantee. and it's a big responsibility you're taking on this debt, right? You got to make sure you understand how to operate and what it's going to take for you to be able to successfully operate this business.

20:25 But I I haven't found anything that is I believe a tool this powerful out there and that's why I'm so passionate about it because you can go from owning this $100,000 startup franchise to buying a second, third, fourth location to then getting 100% financing to buy the building and then branching out. Maybe you you end up realizing, "Hey, I want to own some self storage units." You can do SBA 504 for those. "Oh hey, I want to own a a B&B, a bed and breakfast."

20:59 "Hey Bo, I I operate 20 short-term rentals right now. I want to buy a property management company." SBA eligible. And then you want to do roll-ups, potentially 100% financing. So that's why it's such a strong game. What I find is that people that take this seriously and come prepared and ask good questions, I can tell when somebody knows what they're doing. Like I just closed a acquisition of a construction company. They do like underground civil work and infrastructure work.

21:30 The buyer was so freaking good. Like dialed in, had all of his documents, had multiple business entities. But I was like, this guy is a deal. And we helped him along the way. I think we helped him negotiate. I mean, he did all the work really, but we gave him some data points. He negotiated the price down a million bucks. it was a little bit over six and a half or some somewhere there when they started and then through the process, he got a really good deal. He's going to crush it. But he was a professional buyer.

22:01 He was just polished. Even the bank I work with said, "Look, he's probably the best borrower I've ever worked with." So being a good borrower and having everything dialed in and really understanding the business that you're investing in and like how it works and operates, it's not just slop something together and go, "Hey, cash flows. I want to buy it." Like really understanding it and having a good relationship with the seller is crucial. So when you have a willing buyer and a willing seller, you usually have a deal as long as the thing cash flows, right? But getting to the finish line is sometimes a little bit of a challenge because you're asking for additional documents from the seller.

22:40 You're sometimes negotiating terms as you're going through. you usually do a an LOI first before a binding purchase contract. So there are a lot of moving parts that go along there. Now if you're watching this right now, I already told you I was going to give you the course how to get SBA financing to buy your first business digital course on Substack if you email me. I also created a a road map to to help you create your buyer box or your thesis.

23:10 And it doesn't cost you any money. Just go to businessownershipblueprint.com. And it it's a questionnaire and then you finish the questionnaire and it actually takes you to the spot-on assessment, the business assessment. That'll take you 15 to 18 minutes generally to to do that. It sends me a copy, it sends you a copy. and then if you're inclined to, it also says book a call with me. You can book a call with me and we meet on Zoom for 30 minutes. Get to know each other.

23:38 I find out a little bit more about your you, your goals, your hobbies, your passions, your vision. What kind of legacy you're trying to live and leave for your family. Or maybe you're just starting a family. and we we start the process from there. No stress, no pressure. I already know that not everybody is going to end up investing in a franchise to start up or franchise resale, but I can coach you along the way. Maybe it's a business acquisition. I help you structure the financing for that that's non-franchise. I think we myself and our team we provide a lot of value and most of the time it's at no cost. So we're paid generally we're paid by the banks a referral fee and if we connect you with the right business, we're paid a a referral fee or commission as well. So that's how we make money. That's how we operate. So I think the difference with me is I have a a very diverse background. Real estate broker.

24:35 Been in lending for 28 years. Residential, bridge money, fix and flip, investor, owned businesses. and I'm pretty honest and transparent and ultimately I was on a call with the gentleman. He wanted to look at franchises and then he then he showed me the other day. He said, "Yeah, I'm he told me he's working on doing He lives in South Carolina and he's doing a buying land and putting manufactured homes on it and then you know fixing them to the property so they can sell as real property and you can get FHA financing.

25:08 And I told him I said look man, you got a good thing going. I don't think a franchise is the right fit for you right now. He said yeah, totally. He's like I'm like you need to go deep on this cuz you're crushing it right now. He's done four of them. Go do 10 next year. Let's circle back in a year or two. and see if we can vertically integrate some sort of business into your real estate brokerage or right like that would make sense. A complimentary or vertically integrated business.

25:33 So the point is is that look owning a business buying a business is a big deal. It's a commitment. So obviously if you don't know what you don't know, you need to at least do some discovery. So I think we do a nice job of discovery. and you know, we stay really busy. So I would say we're not the ones that are going to be calling you 24/7. It's really on you to be committed to the process.

25:58 So we what we look for is people that are committed to at least going through the process and not putting one toe in but actually like when we if we match you with three or four different franchises you we want you to get to know them and make go through a process to see if it's a good fit for you. Like if you just go you know, I I'm interested but I'm not, you'll never get to the finish line.

26:21 Meaning you got to understand you got to get on lots of calls. If you're like when we do our deep dive and then I do a business model review with you and we have seven or eight businesses that we show you. We like for you to pick two or three to learn more about. Then we introduce you to the franchise development rep. They take you through a process. You have to be invested enough to go through the process to understand the business. A lot of people what I'm finding is their comfort of their golden handcuffs of their job and it's hard for them to move.

26:54 You know, certain people can quit their job and like maybe they have more reserves or they're just their you know, just the way they're wired, you know, and some of you don't really need to quit your job and you're looking for a a business that's semi-involved or semi-absentee, which they're out there. But you have to understand in the beginning you got to learn everything. It's not you can't just hire general managers, it's not going to run.

27:19 So, I think with myself and our our team's knowledge, we can really help you get to the next level and not only can help you find it, I can help you fund the business as well. We do a business ownership summit quarterly. We do real estate and business expo because I'm not just business, I'm not just real estate. I like both. So, we bring on real estate investors, business owners, franchises. So, without without taking up too much time, have a great day and I got to go over there, close it out. But thank you guys so much, appreciate it.