How to Sell Small Business Loans

Small business loans can be a great way to get your small business’ feet off the ground, or help you to fund major expansions. However, they are not particularly easy to qualify for, so it’s up to you to ensure that you gather everything and fill out your application properly. If you have everything ready ahead of time, it will make it far easier for you to put in the application quickly once the right opportunity comes up.

Selling small business loans is not about having good sales skills or understanding the marketing strategies for small business start ups. It’s so much more than that. It is about understanding the psyche of a person who owns and runs a small business.

If you want to learn how to sell small business loans, you’ve come to the right place. As a successful business owner, I know that one of the greatest skills is knowing how to sell . That’s why so many companies offer sales training. The art of selling is an essential skill to have in any business.

If you’re a small business owner, you know the importance of capital in your business. If you need funds that cannot be obtained through debt financing, you could always go bank on small business start up loans. These can help you expand or even just maintain your existing operations.

How to Sell Your Small Business

Reviewing these seven considerations can help you build a solid plan and make negotiations a success.

1. Reasons for the Sale

You’ve decided to sell your business. Why? That’s one of the first questions a potential buyer will ask.

Owners commonly sell their businesses for any of the following reasons:

Retirement
Partnership disputes
Illness or death
Becoming overworked
Boredom

Some owners consider selling the business when it is not profitable, but this can make it harder to attract buyers. Consider the business’s ability to sell, its readiness, and your timing.

There are many attributes that can make your business appear more attractive, including:

Increasing profits
Consistent income figures
A strong customer base
A major contract that spans several years

2. Timing of the Sale

Prepare for the sale as early as possible, preferably a year or two ahead of time. The preparation will help you to improve your financial records, business structure, and customer base to make the business more profitable. These improvements will also ease the transition for the buyer and keep the business running smoothly.

3. Business Valuation

Next, you’ll want to determine the worth of your business to make sure you don’t price it too high or too low. Locate a business appraiser to get a valuation. The appraiser will draw up a detailed explanation of the business’s worth. The document will bring credibility to the asking price and can serve as a gauge for your listing price.

4. Should You Use a Broker?

Selling the business yourself allows you to save money and avoid paying a broker’s commission. It’s also the best route when the sale is to a trusted family member or current employee.

In other circumstances, a broker can help free up time for you to keep the business up and running, or keep the sale quiet and get the highest price (because the broker will want to maximize their commission). Discuss expectations and advertisements with the broker and maintain constant communication.1

5. Preparing Documents

Gather your financial statements and tax returns dating back three to four years and review them with an accountant. In addition, develop a list of equipment that’s being sold with the business. Also, create a list of contacts related to sales transactions and supplies, and dig up any relevant paperwork such as your current lease. Create copies of these documents to distribute to financially qualified potential buyers.

Your information packet should also provide a summary describing how the business is conducted and/or an up-to-date operating manual. You’ll also want to make sure the business is presentable. Any areas of the business or equipment that are broken or run down should be fixed or replaced prior to the sale.

6. Finding a Buyer

A business sale may take between six months and two years according to SCORE, a nonprofit association for entrepreneurs and partners of the U.S. Small Business Administration. Finding the right buyer can be a challenge. Try not to limit your advertising, and you’ll attract more potential buyers.

Once you have prospective buyers, here’s how to keep the process moving along:

Get two to three potential buyers just in case the initial deal falters.
Stay in contact with potential buyers.
Find out whether the potential buyer pre-qualifies for financing before giving out information about your business.
If you plan to finance the sale, work out the details with an accountant or lawyer so you can reach an agreement with the buyer.
Allow some room to negotiate, but stand firm on a price that is reasonable and considers the company’s future worth.
Put any agreements in writing. The potential buyers should sign a nondisclosure/confidentiality agreement to protect your information.
Try to get the signed purchase agreement into escrow.

You may encounter the following documents after the sale:

The bill of sale, which transfers the business assets to the buyer
An assignment of a lease
A security agreement, which has a seller retain a lien on the business

In addition, the buyer may have you sign a non-compete agreement, in which you would agree to not start a new, competing business and woo away customers.

A business broker often charges an average of 10% for businesses under $1 million; while that may seem steep, the broker may also be able to negotiate a deal that is better for you than the one you would have arranged by yourself.

7. Handling the Profits

Take some time—at least a few months—before spending the profits from the sale. Create a plan outlining your financial goals, and learn about any tax consequences associated with the sudden wealth. Speak with a financial professional to determine how you want to invest the money and focus on long-term benefits, such as getting out of debt and saving for retirement.

How Do You Sell a Small Business Without a Broker?

While many people would like to avoid the 10% a business broker may charge, the risks of selling on your own may outweigh the loss of money. But if you’re going to go it alone, prioritize selling to a buyer you know, make use of the advice of experienced, retired owners and executives, and use all the internet resources available, such as the Small Business Administration, or the National Federation of Independent Business (NFIB).

How Do You Sell a Business Idea?

It’s possible to approach a company with a business idea, but first, you need to do your research, prepare a presentation, and research and approach potential targets. While some business plans are best protected with a patent, others can be secured by getting a potential company you want to work with to agree to a non-disclosure agreement.

What Are the Steps for Valuing a Business for Sale?

To value your business, you can turn to a professional business evaluator for an objective estimate of the value of the business. You can also determine value by determining the market capitalization, looking at earnings multipliers, book value, or other metrics.2

How Much Does It Cost to Sell a Business?

If you go through a business broker, and your business is under $1 million, the broker’s commission is likely 10% to 12%. Other fees that can crop up include attorney fees, marketing fees, the costs of making any cosmetic or more substantial upgrades to your business so as to make it more sellable. There are also fees that may come up if you are transferring a lease to the new owner of your business.2

How Do You Sell a Business to a Competitor?

The process of selling to a competitor would involve the same steps as selling to a company that is not a competitor.

How Do You Sell a Business Online?

Selling a business involves negotiations, discussions, and a lot of leg work. If it’s not possible for all this to occur in person, then certainly using services like Zoom or Skype to hold business meetings with potential buyers digitally is possible.

How Do You Sell a Business Quickly?

Even if you are selling to a close family member or employee, rushing through the sales process is not advised. However, if a relatively quick turnaround is needed, hire a business broker to speed up the proceedings.

How Do You Sell a Franchise Business?

You’ll need to work in conjunction with your franchiser, as they will need to determine if the new buyer is appropriate. Plus, that new buyer will need to sign a franchise agreement with the franchiser.3 There are a variety of fees and rules associated with owning or selling a franchise that can be found in the FTC’s compliance guide.

1. How Do You Sell Your Share of a Business?

Selling your share of a business to your other partners or partner is a common ownership transfer method, particularly for small businesses. Having an agreement in place with your partners ahead of the sale will help smooth the transition, increasing the likelihood that both the staying and exiting partners benefit.5

Utilities payments
Operations expenses (such as software costs)
Property damage costs not covered by insurance
Costs of protective equipment, such as masks

The amount of loan you can obtain is calculated as follows:

Up to 2.5 times average monthly payroll for most businesses
Up to 3.5 times average monthly payroll for accommodation and food services businesses
In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019.

Businesses that receive a new PPP loan under the newly reopened program are eligible to have the loan forgiven through a simplified loan forgiveness application. Small businesses may apply for a PPP loan from a local lender or online lender.

SBA disaster loans. The SBA has a disaster loan program for businesses that have suffered from a declared disaster, including the Covid-19 pandemic. The COVID-19 Economic Injury Disaster Loan (EIDL) is intended to help affected businesses.

Key elements of the EIDL program are:

Eligible borrowers include small businesses who have suffered substantial economic injury as a result of the Covid-19 pandemic.
Loans are available to businesses based in any U.S. state, territory, or Washington, D.C.
Loans can be used for working capital and normal operating expenses (i.e., continuation of health-care benefits, rent, utilities, and fixed debt payments).
The interest rate on loans is typically 3.75%, and loans are payable over 30 years.
EIDL loans are not forgivable, unlike PPP loans.
There are no prepayment penalties or fees.
Payments are deferred for the first year of the loan, although interest accrues.

Small businesses can apply directly online for an EIDL loan through the SBA website.

Small business line of credit. Under a small business line of credit, your business can access funds from a lender as needed. There will be a cap on the amount of funds accessible (e.g., $100,000), but a line of credit is useful for managing a company’s cash flow and unexpected expenses. There will typically be a fee for setting up a line of credit, but you don’t get charged interest until you actually draw down the funds. Interest is typically paid monthly, and the principal drawn down on the line is often amortized over years. However, most lines of credit require renewal annually, which may require an additional fee. If the line is not renewed, you will be required to pay it in full at that time.

Accounts receivable financing. An accounts receivable line of credit is a credit facility secured by the company’s accounts receivable (AR). The AR line allows you to get cash immediately, depending on the level of your accounts receivable; the interest rate is variable. The AR line is paid down as the accounts receivable are paid by your customers.

Working capital loans. A working capital loan is a debt borrowing vehicle used by a company to finance its daily operations. Companies use such loans to manage fluctuations in revenues and expenses due to seasonality or other circumstances in their business. Some working capital loans are unsecured, but companies that have little or no credit history will have to pledge collateral for the loan or provide a personal guarantee. Working capital loans tend to be short-term loans of 30 days to one year. Such loans typically vary from $5,000 to $100,000 for small businesses.

Small business term loans. Term loans are typically for a set dollar amount (e.g., $250,000) and are used for business operations, capital expenditures, or expansion. Interest is paid monthly and the principal is usually repayable within six months to three years (which can be amortized over the term of the loan or have a balloon payment at the end). Term loans can be secured or unsecured, and the interest can be variable or fixed. They are good for small businesses that need capital for growth or for large, onetime expenditures.

SBA small business loans. Some banks offer attractive low-interest-rate loans for small businesses, backed and guaranteed by the SBA. Because of the SBA guarantee, the interest rate and repayment terms are more favorable than most loans. Loan amounts range from $30,000 to as high as $5 million. However, the loan process can be time consuming with strict requirements for eligible small businesses. Visit the SBA website to see a list of the 100 most active SBA lenders.

Equipment loans. Small businesses can buy equipment, vehicles, and software through an equipment loan. This typically requires a down payment of 20% of the purchase price of the equipment, and the loan is secured by the equipment. Interest on the loan is typically paid monthly and the principal is usually amortized over a two- to four-year period. Loan amounts normally range from $5,000 to $500,000, and can accrue interest at either a fixed or variable rate. Equipment loans can also sometimes be structured as equipment leases.

Small business credit cards. While some business owners may be wary of using them, small business credit cards can also act as short-term small business financing. Interest rates will vary depending on the credit card issuer, the amount available on the card, and the creditworthiness of the holder of the card. Many small business credit card issuers require the principal owner to be co-liable with the company. Issuers of small business credit cards include American Express, Brex, CapitalOne, Bank of America, and many others. Many credit cards offer promotional introductory rates of 0% for a short period of time (six to nine months). Cashback and rewards programs allow you to earn rewards from purchases on the credit card.

2. Research available lenders

There are more lenders than ever willing to lend to small businesses, and many of the lenders can be found from a simple online search. Here are the main types of lenders:

Direct online lenders. There are a number of online lenders that make small business loans through a relatively easy online process. Reputable companies such as PayPal can provide very fast small business cash advances, working capital loans, and short-term loans in amounts from $5,000 to $500,000. Sites such as Fundera offer access to multiple lenders, acting as a lead generation service for lenders.
Large commercial banks. The traditional lenders to the small business market are banks such as Wells Fargo, JP Morgan, and Citibank. The loan approval process tends to be slower due to more rigorous loan underwriting criteria.
Local community banks. Many community banks have a strong desire to make small business loans to local businesses.
Peer-to-peer lending sites. There are a number of sites that act as middlemen between individual and institutional lenders and small borrowers, including SMBX, LendingClub, and Funding Circle. These lenders can make decisions relatively quickly.
Bank lenders backed by SBA guarantees. A number of bank lenders issue loans backed by the SBA, and, as noted above, this backing allows lenders to offer more attractive terms.

3. Anticipate how lenders will view your credit and risk profile

Lenders ultimately make a judgment call on whether or not to make a small business loan based on the borrower’s credit and risk profile. Lenders will look at the following factors, so review them carefully and consider taking any appropriate remedial action:

Credit score/credit report. Lenders will review your credit report, credit score, and history of making timely payments under credit cards, loans, and vendor contracts. So review your credit report and clean up any blemishes.
Outstanding loans and cash flow. Lenders will review your outstanding loans and debts to determine that your cash flow will be sufficient to pay existing loans and obligations as well as the new loan contemplated.
Assets in the business. Lenders will review the assets in the business (particularly current assets such as cash and accounts receivable) to see if there is a good base of assets to go after in the event of a loan default.
Time in business. Lenders will tend to look more favorably on businesses that have been operating for several years or more.
Investors in the company. Lenders will view the company more favorably if it has professional venture capital investors, strategic investors, or prominent angel investors.
Financial statements. Lenders will scrutinize your financials, as set forth in the next section below.

4. Make sure your financial statements are in order

Depending on the size of your loan, your financial statements and accounting records will be reviewed carefully by the lender. So make sure they are complete, correct, and thorough—including balance sheet, income and loss statements, and cash flow statements. The lender will analyze your cash flow, gross margin, debt-to-equity ratio, accounts payable, accounts receivable, EBITDA, and more, so be prepared to answer questions on those topics. Consider having your accountant look over your financial statements to anticipate issues a lender may raise.

Lenders prefer financial statements that have been audited by a certified public accountant (CPA), but many small businesses don’t want to incur the costs of an audit. One alternative is to have the financial statements “reviewed” by a CPA (which is cheaper and faster). However, some lenders may not require either audited or reviewed statements.

5. Gather detailed information for your small business loan application

If you want to be successful getting a small business loan, you have to be prepared to provide detailed information and documents about your business; it is important to be prepared and organized. The following is the type of information that is often required from bank lenders, depending on the type of loan:

Name of business (including any DBAs)
Federal Tax ID
List of executive officers and their background
Legal structure (such as LLC, S corporation, C corporation)
Financial statements for the past two to three years and year-to-date financials for the current year (balance sheet, income and loss statements, cash flow statements, shareholder equity)
Projected financial statements (so that the lender can get a sense of your expected future operations and cash flow)
State filings for the company, such as a certificate of incorporation, foreign corporation filings, and good standing certificates
Copies of key man and general liability insurance policies
Amount of loan requested
Business credit report (such as from a credit reporting agency like Dun & Bradstreet)
Potential collateral available for the loan
Financial statements of the principal shareholder/owner of the business (especially in the case where a personal guarantee will be required)
Business plan, executive summary, or investor pitch deck of the company (see A Guide to Investor Pitch Decks for Startup Fundraising)
The tax returns of the company for the past two to three years (signed copies with all attachments and exhibits)
Business bank statements

6. Be prepared to specify how much you want to borrow and the expected use of proceeds from the loan

The lender will want to know how much funding you are seeking and how the loan proceeds will be used. Will the loan be used for equipment or capital expenditures? Expansion or hiring? Increase in inventory? Enhanced sales and marketing efforts? New research and development of technology? New product development? Expansion into new facilities or territories?

You may want to borrow a little extra in case you run into a cash crunch that lasts a month or two. You have to avoid going into default under the loan.

7. Determine what security or guarantee can be provided

A lender is primarily concerned about the ability of the borrower to repay the loan. To the extent that a security interest can be given to the lender on company assets (company equipment, property, accounts receivable, etc.), the borrower should be able to increase its chances of getting a loan on favorable terms. Some lenders may insist upon the personal guarantee of the principal owner of the business. That is best avoided, if possible, as it puts your personal assets, and not just the business assets, at risk.

8. Analyze the key terms of the proposed business loan

To make sure the proposed business loan makes sense for your business, you will need to analyze the key terms proposed by a lender and compare them with terms available from alternative lenders. Here are the key terms to review:

What is the interest rate on the loan and how can it vary over time? Many loans vary over time depending on the prevailing “prime rate” or some other benchmark.
How often is the interest payable?
When is the principal due or how is it amortized over the life of the loan? You need to be comfortable with the combined interest and principal payments from a cash flow perspective.
What is the loan origination fee?
What other costs or fees are imposed (such as underwriting fees, administration fees, loan processing fees, etc.)?
What operating covenants are imposed on your business (such as a maximum debt-to-equity ratio or a minimum cash threshold held by the company)?
What are the circumstances when the lender can call a default on the loan?
Is there any security or collateral required?
What periodic reports or financial statements are required to be provided to the lender?
Are there limits on how the loan proceeds can be used?
Can the loan be prepaid early without a penalty? And if there is a penalty, is the penalty reasonable?

9. Review your online profile and postings

A small business lender will perform due diligence, which can include reviewing the information available online about the business and its principal owner. So do the following review, anticipating such due diligence to see if you should make any changes or deletions to your online presence:

Review your company’s website. Is it up-to-date and professional looking?
Review its presence on LinkedIn, Facebook, Twitter, and other social media sites.
Review any Yelp reviews your business may have received.

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Constant Contact, HubSpot, Mailchimp, Sendinblue, and GetResponse are by all accounts excellent email marketing solutions, but Moosend is the best among them due to its ability to offer all the features that businesses might need, with the added benefits of affordability and an almost non-existent learning curve.

Conclusion

Small businesses are the backbone of our economy. Due to this importance, there are various small business loan programs and funding options that can come into play when a small business owner is trying to raise the capital they need to launch or sustain their business.

A new business owner might ask: how much can a small business loan be? The answer depends on two aspects: the amount of capital you need, and your credit rating. Small business loans are designed for startup companies that do not have enough capital to launch their products and charge a reasonable price for them. Depending on the situation, a startup company can also use personal money from its founder.