Loan type
Business acquisition loans: financing the purchase of an existing company
Buying a business is the one case where a lender will hand you money based mostly on someone else's track record. Here is how the structure and the underwriting work.
At a glance
| Primary vehicle | SBA 7(a), up to $5 million |
|---|---|
| Rate | 10.0% - 14.0% APR |
| Term | 10 years for the business; up to 25 if real estate is included |
| Buyer injection | Minimum 10% of total project cost |
| Seller financing | Often 10% to 25%, and can count toward the injection if held on full standby |
| Collateral | Business assets, plus a lien on personal real estate where equity exists |
| Key metric | Debt service coverage of 1.25x or better on the target's historical cash flow |
| Time to close | 60 to 120 days |
A good fit when
You are buying a profitable business with clean books, you have relevant experience, and you can put in at least 10%.
A poor fit when
The seller's books are a mess, the business depends entirely on the seller personally, or the price is set by a multiple nobody can justify.
How the money usually stacks
A typical SBA-financed acquisition of a $2,000,000 business is not one number. It is a stack, and the stack is negotiable.
| Piece | Typical share | Notes |
|---|---|---|
| SBA 7(a) loan | 75% to 90% | The bulk. Ten-year amortization, no balloon. |
| Buyer cash injection | 10% minimum | Must be your money or a properly documented gift; borrowed funds generally do not count. |
| Seller note | 0% to 25% | If on full standby for the life of the SBA loan, up to half the required injection can come from here. |
| Earn-out or holdback | Varies | Structured outside the loan; useful when the parties disagree about the future. |
What the lender is really underwriting
Not you, mostly. The target.
The target's historical cash flow
Three years of tax returns and financials. The lender computes seller's discretionary earnings or adjusted EBITDA, then tests whether it covers the new debt service at 1.25x or better after paying you a reasonable salary. If it does not, the deal does not finance at that price, no matter how much you want it.
The quality of the add-backs
Every seller adds back personal expenses to inflate earnings. Some are legitimate — a one-time legal settlement, the seller's above-market salary. Some are not. Underwriters scrutinise this line hard, and an aggressive add-back schedule is the fastest way to lose credibility.
Customer concentration
If one customer is 30% or more of revenue, expect questions and possibly a structural response — a larger seller note, an earn-out, or a decline.
How transferable the business is
A business where the seller is the relationship, the licence, and the reason customers stay is a hard credit. Lenders look for a transition period, a documented customer base, and staff who will remain.
Your experience
You do not need to have run this exact business, but you need a credible story. Direct industry experience is best; management experience in an adjacent field is workable; neither is a problem.
Stock sale or asset sale
This choice affects your financing, your taxes, and your liability, and it is usually settled before the lender is even involved — which is a mistake.
| Asset sale | Stock sale | |
|---|---|---|
| What you buy | Specified assets and assumed liabilities | The entity itself, and everything in it |
| Buyer preference | Strongly preferred — clean liabilities, stepped-up basis | Rarely |
| Seller preference | Less favorable tax treatment | Preferred |
| Contracts and licences | May need consent or reissue | Usually transfer automatically |
| SBA view | Straightforward | Permitted, with more diligence |
If the business holds a licence, a lease, or a contract that cannot be reassigned, a stock purchase may be the only workable route. Find that out in week one, not week ten.
Questions people actually ask
How much do I need to buy a business with an SBA loan?
At least 10% of the total project cost as an equity injection, and total project cost includes the purchase price plus closing costs plus any working capital you build into the loan. On a $1 million purchase, plan on roughly $100,000 to $150,000 of your own money — though up to half of the required injection can sometimes come from a seller note on full standby.
Can I buy a business with no money down?
Not with SBA financing — the 10% injection is a program requirement. Genuine no-money-down acquisitions happen through full seller financing outside the SBA, and those sellers are rare and usually selling for a reason worth understanding.
What if the seller's books are a mess?
This is common in small business and it is not automatically fatal, but it moves the work to you. Reconstruct from bank statements, merchant processing reports, and tax returns. If the reconstructed number is materially below what the seller claims, that is your price negotiation. If it cannot be reconstructed at all, no SBA lender will finance it.
Can I use a 401(k) to fund the down payment?
There is a structure called a ROBS — Rollover as Business Startup — that lets you use retirement funds as equity without an early-withdrawal penalty. It is legal, the SBA accepts it as a valid injection, and it is genuinely complex, with ongoing compliance obligations and real downside if done wrong. Use a specialist provider and your own tax advisor, not a generalist.