Acquisition Financing
SBA 7(a) Acquisition Financing
A general overview of how SBA 7(a) loans work for buying an existing business. Specifics vary by lender and by the current SBA SOP (50 10).
The short version
An SBA 7(a) loan is a bank loan partially guaranteed by the government, which lets a lender finance the acquisition of a small business with far less buyer cash than a conventional deal. A purchase is typically funded with an SBA loan + an equity injection (minimum 10%) + (optionally) a seller note. The business's own cash flow must cover the debt (DSCR ≈ 1.15–1.25x), and every owner of 20% or more personally guarantees the loan.
The acquisition capital stack
Purchase price is funded from three sources.
| Source | Typical role |
|---|---|
| SBA 7(a) loan | The bulk of the price (often 70–90%). The bank funds it; the SBA guarantees a portion (usually around 75%). |
| Equity injection | The buyer's cash into the deal. Minimum 10% of total project cost. |
| Seller note | Optional. The seller finances part of the price. On full standby, it can also help meet the equity requirement. |
The 10% equity injection
- The SBA requires a minimum 10% equity injection on a full change of ownership.
- A seller note on full standby (no payments for a defined period, commonly 24+ months) can count for up to half of that 10%; the rest must be genuine equity — the buyer's cash or a documented gift.
- Injection funds must be sourced and seasoned (shown on bank statements) and generally not borrowed, unless structured as standby.
Personal guaranty
- Every owner of 20% or more of the borrower personally guarantees the loan (unlimited). Spouses may need to sign in some cases.
- This is full recourse — the guaranty survives the entity. It is the single biggest personal-risk feature, and the reason ownership structure matters.
Typical terms
- Term: up to 10 years for a goodwill-heavy business acquisition (longer if real estate is involved).
- Rate: variable, Prime + a spread (the spread is capped by the SBA; often Prime + 2.75–3%). Fixed options exist.
- SBA guaranty fee + closing costs: a few percent of the loan, often financed into the loan.
- Collateral: a lien on business assets; personal real estate may be taken if available (not applicable to a renter).
Debt-service coverage (DSCR)
- The business must show enough cash flow to cover the loan payments. Lenders look for DSCR ≈ 1.15–1.25x, typically measured on cash flow after a reasonable owner's salary.
- Add-backs (owner comp, one-time or personal expenses run through the P&L) increase the qualifying cash flow — so the adjusted SDE/EBITDA is what really drives approval.
- Any financing with required monthly payments adds to debt service and lowers DSCR. A standby or balloon note with no payments during the term does not hit DSCR.
Process & timeline
- Pre-qualification (financials, tax returns, personal financial statement, business plan/projections) → application → underwriting → SBA authorization → closing.
- Realistically ~45–90 days from a complete package. Sellers who need a fast, certain close sometimes resist SBA for this reason — a meaningful deposit, a strong-borrower profile, and a firm timeline help counter that.
What lenders ask for
A typical package: a Personal Financial Statement (SBA Form 413); three years of personal and business tax returns; year-to-date interim financials; a business debt schedule; a business plan with two-year projections; and a company background / executive summary.
This primer is general educational information about the SBA 7(a) framework (SOP 50 10), which changes over time; outcomes depend on your specific facts. It is not legal, tax, or lending advice. Confirm any structure with your SBA lender, a CPA, and counsel before relying on it.