Why Buyers Choose SBA Loans
The Small Business Administration’s 7(a) loan program offers flexible terms, longer amortisation schedules, and lower down payments than many conventional loans. For acquisitions under $5 million, SBA-backed financing can bridge the gap between buyer capital and seller expectations while spreading risk across lenders, the government, and the borrower.
Sellers also benefit. When a buyer presents a credible SBA plan, it signals lender involvement, organised documentation, and the capacity to close. Understanding the program helps both parties plan realistic timelines and contingencies.
Core Eligibility Requirements
SBA loans are designed for small businesses operating in the United States. Buyers must demonstrate good character, relevant industry experience, and the ability to inject at least 10% equity. The target company must be a for-profit entity with tangible net worth below program thresholds.
- Buyer FICO scores typically above 680 and clean legal history.
- Post-closing debt service coverage ratio of at least 1.15x.
- U.S. citizenship or lawful permanent residency for majority owners.
- No passive ownership—buyers must actively manage the acquired business.
Some industries—like speculative real estate or lending—are ineligible. Work with an SBA Preferred Lender to confirm qualifications early in the process.
Understand the Capital Stack
SBA 7(a) deals typically combine lender funds, buyer equity, and seller financing. While the program allows seller notes, at least 5% of the total project cost must come from the buyer’s own cash injection when seller standby financing is used.
Common structures include:
- 10% buyer equity, 75% SBA-guaranteed bank loan, 15% seller note on full standby.
- 15% buyer equity and 85% bank loan when no seller financing is available.
- Working capital lines layered on top of the term loan to fund inventory and payroll.
Clarify how earnouts or performance-based payments fit within SBA rules, as contingent consideration can complicate underwriting.
Prepare for Documentation and Timelines
Expect a detailed review of tax returns, financial statements, and ownership records for both buyer and seller entities. Assemble the following early to avoid closing delays:
- Three years of business and personal tax returns.
- Year-to-date financial statements and ageing reports.
- Business plan outlining transition strategy and management roles.
- Signed purchase agreement or letter of intent with clear terms.
SBA transactions often take 60–90 days from LOI to funding. Build in time for third-party reports such as business valuations, equipment appraisals, and environmental assessments.
Coordinate with Your Deal Team
Align expectations among the lender, broker, attorney, and CPA supporting the deal. Set a weekly cadence for document updates and open tasks, and track key milestones like credit committee approval and SBA authorization numbers.
With early preparation and transparent communication, SBA financing can provide a dependable path to closing—enabling buyers to acquire quality companies and sellers to exit with confidence.