Buying a business with an SBA loan

Can you use an SBA loan to buy a business?

Yes. Buying an existing business is one of the most common uses of an SBA 7(a) loan. The SBA calls it a change of ownership, and it covers buying a whole company, a professional practice such as a dental or veterinary practice, a franchise resale, or a partner’s share of a business you already own.

An acquisition loan can pay for:

• The purchase price, including goodwill
• Inventory, equipment and other assets that come with the business
• Working capital to operate after closing
• Real estate the business uses, in the same loan or alongside a 504 loan
• Eligible closing costs and the SBA guaranty fee

The maximum 7(a) loan is $5 million. Because lenders lend against the business’s cash flow, not just its hard assets, an SBA loan is often the only practical way to finance a business whose value is mostly goodwill.

What kinds of acquisitions does the SBA finance?

The SBA’s current rules, SOP 50 10 8.1, sort acquisitions into four types, and the requirements differ for each:

Acquisition type	What it means	Minimum equity
Initial acquisition	You’re buying a business you don’t already own. This is the default.	10%, which can’t be reduced
Business expansion	Your existing business buys another business.	10%; the lender may reduce it if your business is strong
Owner buyout	You buy out a partner, fully or partly.	10%; the lender may reduce it if your business is strong
ESOP or co-op	Employees buy the business.	None

How much down payment do you need to buy a business with an SBA loan?

For an initial acquisition, the SBA requires an equity injection of at least 10% of the total project cost, and that minimum can’t be waived. Lenders may ask for more when cash flow is tight or the buyer is new to the industry.

Can a seller note count toward the down payment?

Partly. A seller note counts toward your equity only if it is subordinated and on full standby: the seller receives no principal or interest payments for the entire term of the SBA loan. Seller notes on full standby, other standby debt and minority equity together can cover no more than half of the required injection. The rest has to be your own money.

A seller note that is paid during the SBA loan is still allowed, but it doesn’t count as equity. The lender counts its payments when it checks whether the business can cover all of its debt, and total debt can’t exceed the business’s appraised value. Once you’ve made 36 months of on-time payments, a seller note can be refinanced.

How long can an SBA business acquisition loan be?

Acquisition loans are repaid over up to 10 years. When the purchase includes real estate, the real estate share can stretch to 25 years and the lender blends the two into one term.

What do lenders look for when you buy a business?

Lenders underwrite the business you’re buying and you as the new owner. Expect them to focus on:

1. Cash flow. The business’s historical earnings must cover the new loan payments with room to spare. For an initial acquisition the SBA requires debt service coverage of at least 1.25x.
2. A business valuation. Purchases above $350,000 need an independent valuation from a credentialed appraiser. Below that, the lender may value the business itself if buyer and seller aren’t closely related.
3. A Quality of Earnings report for purchases of $3 million or more. An accounting firm verifies that the seller’s reported earnings are real and repeatable.
4. Your experience. Industry or management experience, or a solid plan to transition with the seller.
5. Your equity and personal finances. Proof of where your injection comes from, your personal financial statement and credit history.

Can you use an SBA loan to buy out a partner?

Yes. The SBA treats it as an owner buyout, and you can buy all or part of a partner’s interest. A few rules apply:

• A selling partner who keeps less than 20% must personally guarantee the loan for 2 years.
• New owners must be co-borrowers on the loan.
• If you’ve worked in the business for less than 24 months, you can’t end up with majority ownership unless the deal is underwritten as an initial acquisition.
• Buyouts staged over several steps aren’t eligible; buy the interest in one transaction.

What documents do you need to buy a business with an SBA loan?

Most lenders will ask for:

• A signed letter of intent or purchase agreement
• The business’s last three years of tax returns and financial statements, plus year-to-date figures
• A list of the assets included and any real estate lease or purchase contract
• Your resume, personal financial statement (SBA Form 413) and personal tax returns
• Bank statements showing where your equity injection comes from
• SBA Form 1919 and any franchise agreements, if the business is a franchise

How do you find a lender for a business acquisition?

Lenders differ a lot on acquisitions. Some finance dozens of practice purchases a year; others rarely do goodwill-heavy deals. The SBA’s loan records show which lenders actually fund changes of ownership in each industry and state.

SBA Loan Connect uses those records to show you the lenders most active in acquisitions like yours. See how we rank lenders, or tell us about the business you’re buying to see your matches.