Many conventional lenders will have an official minimum AUM requirement of $20M to $50M to be considered for even a small loan. The SBA itself does not have a minimum AUM requirement, but many SBA lenders do set a borrower minimum AUM of $20M to $30M. AdvisorLoans does not have a minimum AUM size we will work with for SBA loans, we even help advisors with no AUM get acquisition loans.

Conventional lenders typically won’t touch a loan under $250K (if that) and may think they are doing you a favor for a loan under $500K.

SBA lenders focused on the wealth management industry vary on their minimum loan amounts they'll do, but $250K is common. AdvisorLoans can handle SBA loans as low as $100K.

The conventional lenders focused on advisor lending are typically comfortable up to $10M, but some will start getting queasy when loan amount gets north of this.

However, there are conventional lenders that do not have any issues getting loans in the $20M range funded and willing to get other lenders to participate in larger loans that exceed their limit.

The maximum SBA 7(a) loan amount(s) that the SBA will guarantee is $5 million.

For personal cash flow ratios some lenders will use the same calculation as they do with the business DSC and may or may not have the same minimum ratio, or have a minimum combined (personal and business) which is called a “global” DSC.

SBA requires a 1.1 personal DSC.

Conventional lenders differ on personal cash flow and debt requirements but all of them look at personal as well as business DSC.

A conventional lender can also look at personal debt to income (Personal Annual Debt Service / Total Personal Income) and require a maximum of 30%-40% debt for example.

Understanding Acquisition Cash Flow

For banks, cash flow is king. It tells them if your business can generate enough income to cover ongoing expenses, debt payments, and still have enough leftover to support the acquisition.

Personal
Of course different entity models are addressed differently but the bottom line from a cash flow perspective is what is your business DSC. What margin percentage and total dollars are we looking at? Regardless of sole prop or S corp, when your business overhead which includes your personal income, is accounted for what is your NOI (net operating income)?

Business
Your Business Cash Flow: This includes your revenue, expenses, and net operating income (NOI).

Can you have a great business but be so out of line in your personal finances that you can't get your acquisition loan approved? Both SBA and conventional lenders will factor your personal cash flow ratios into their approval. SBA loans require a personal DSCR of minimum 1 to 1 and conventional lenders will have a 30% to 40% maximum personal debt to income maximum.

Seller
Seller's Business Cash Flow: The seller's financial health impacts the overall deal's profitability.

When purchasing a book, or only client assets and no overhead, the cash flow is easy because 100% of it flows to the buyer's financials for calculations. If purchasing a practice where you will be taking on additional overhead then the EBOC or earnings before owner compensation is the primary focus as well as any add-backs (amounts logged as expenses which would not be an ongoing expense of the new owner) to put back into the cash flow.

Combined

Combined Pro Forma Cash Flow: This projects the combined cash flow of your and the seller's business after the acquisition. The lender is going to take the buyer and seller's combined EBIT and subtract the annual debt service from the loan and look at the DSCR for the previous tax year, the year before that, the interim YTD, and projected year.

Calculating Cash Flow

The minimum DSC ratio required, when and if a policy exception can be made, and exactly how the DSC is calculated will all vary by lender.

Many acquisition deals cash flow high enough that these variances won’t make a difference for acquisition loan approval.

However, when cash flow is tight and every dollar counts, the lender’s minimum DSC requirement can make a difference between qualifying with one lender but not another.

Most conventional lenders will have a minimum of 1.25 to 1.75 DSCR (Debt Service Coverage Ratio) minimum depending on the industry and collateral. The SBA mandates a 1.15 business DSCR minimum but most SBA lenders will have a higher minimum ranging from 1.25 to 1.75 DSCR.

Lenders will calculate DSC for both the acquisition deal and for the borrower personally. Unfortunately the ways cash flow is calculated is not an exact uniform policy across the board with all lenders, even with SBA lenders.

To calculate EBITDA for acquisition loans, the bank will typically take the combined buyer and seller net operating income (earnings) and add to it any interest, income tax, depreciation, and/or amortization expenses.

They add the new acquisition loan debt and then look both forward a year and backward a year (often two years) to see if the deal cash flows above their minimum DSCR on a projected and historical basis.

Sometimes it isn’t only what the minimum debt service coverage ratio is but also how the DSCR is calculated.

Most owners who have not acquired before will not have significant interest, depreciation or amortization add-backs.

However an owner who purchased a $2M business a few years ago may be amortizing $250,000 a year and have a $100,000 a year in an interest add-back which would make a significant difference in how cash flow is calculated. You wouldn’t want to use a lender that calculates DSC from EBIT instead of EBITDA in this case.

For personal cash flow ratios some lenders will use the same calculation as they do with the business DSC and may or may not have the same minimum ratio, or have a minimum combined (personal and business) which is called a “global” DSC.

SBA requires a 1.1 personal DSC. Conventional lenders differ on personal cash flow and debt requirements but all of them look at personal as well as business DSC.

A conventional lender can also look at personal debt to income (Personal Annual Debt Service / Total Personal Income) and require a maximum of 30%-40% debt for example.

What is the minimum credit score needed for a business loan?

The minimum credit score needed for a franchise business loan relies primarily on the lender's own credit risk assessment criteria. While minimum score requirements can vary significantly between lenders and loan products, generally, a score of 700 or above is considered favorable for securing competitive rates and terms for most all business loan products. Most conventional loans will require at least north of a 680 and most SBA lenders will require a 625 (many a 640) credit score for loans over $500,000.

800 to 850 - Outstanding
740 to 799 - Very Good
670 to 739 - Good
580 to 669 - Fair
300 to 579 - Poor

While there isn't an industry-wide, universally agreed upon minimum credit score for business loans, a majority of lenders typically look for a score of at least 640—classified as a "fair" level of credit. If your credit score dips below 670, regarded as a "good" level, you'll likely need to have been operating your business for a specified duration and generate a minimum annual revenue.

When is my credit score pulled?

Preferred lenders do not do a hard pull credit score until the loan proposal is executed.

How can I increase my score?

FICO credit scores range from 300 to 850 points and can be obtained from any of the three national credit data reporting agencies (TransUnion, Equifax, and Experian). Each agency gathers information on millions of individual consumers and uses complex proprietary algorithms to determine credit behavior patterns and forecast the likelihood that a particular loan will be repaid.

The data used in determining an individual’s credit score is based on all credit related data. Under guidelines imposed by FCRA, an individual’s credit score does not contain any information pertaining to age, race, gender, or geographical location (zip code).

SBA Loan Credit Scores

The SBA does not have a minimum credit score requirement and defers to the SBA lenders standard credit score policy for loans over $500K. SBA lender credit score minimums vary, but typically range from 625 to 680. For loans under $500K the SBA utilizes the SBBS score.

SBA borrowers for loans up to $500K will begin with a screening for a FICO® Small Business Scoring ServiceSM Score (SBSS Score).

The SBSS Score is calculated based on a combination of consumer credit bureau data, business bureau data, Borrower financials, and application data (The SBSS Score is not to be confused with the Small Business Predictive Score (SBPS) used by SBA’s Office of Credit Risk Management).

The minimum acceptable SBSS score is 155, but that score may be adjusted up or down from time to time.

Why is the lender's score pull different than mine?

Between all three bureaus, there are multiple FICO® Score versions out there being used.

Many SBA lenders are using the TransUnion FICO 4 version but several others are used by different lenders.

Many credit reporting services you might be seeing your FICO score use different FICO Score versions. Common versions used are FICO Score 2, FICO Score 5, FICO Score 8, FICO Score 9…you get the picture.

The TransUnion FICO 4 version isn’t a popular version used outside of banks. It’s not unusual for the TransUnion FICO 4 version to have a lower score (even up to 40-50 points lower) than more widely used versions. This can make a difference and cause alarm when you think you have a 720 score and then the bank pulls your credit and it’s 685.

Borrower Criteria