Most buyers of small businesses in the U.S. finance the purchase with an SBA 7(a) loan. The SBA guarantees part of the loan, so banks lend against a business’s cash flow instead of requiring hard collateral for the full amount. The lender’s central question is simple: can the business’s cash flow pay the loan, with room to spare? Everything else follows from that.
The key SBA 7(a) terms for an acquisition
- Loan size. Up to $5 million for a standard 7(a) loan.
- Equity injection. For a change of ownership, SBA rules (SOP 50 10 8, effective June 2025) require the buyer to inject at least 10% of the project cost.
- Seller note toward the injection. A seller note can cover part of the required injection, up to half of it, only if it is on full standby (no payments) for the life of the SBA loan.
- Term. Usually 10 years for a business purchase without real estate; longer when real estate is included.
- Personal guarantee. Owners of 20% or more of the buyer must guarantee the loan personally.
- Rate. Most acquisition loans are variable, set at the prime rate plus a spread that SBA caps.
SBA rules change. Confirm the current SOP and rate caps with your lender.
How lenders decide: debt service coverage
The lender takes the business’s cash flow available for debt and divides it by the annual payments on all debt. That is the debt service coverage ratio (DSCR). SBA sets a minimum, and many lenders want 1.25 or more. Cash flow means verified earnings after a reasonable salary for whoever runs the business.
Worked example
A laundromat with $205,900 of verified SDE is for sale at $650,000. The buyer puts 10% down and borrows the rest over 10 years at an assumed 10.25%.
| Buyer equity (10%) | $65,000 |
| SBA loan | $585,000 |
| Monthly payment | $7,812 |
| Annual debt service | $93,744 |
| SDE minus a $55,000 manager | $150,900 |
| DSCR with a manager | 1.61x |
| DSCR if the buyer runs it (no manager) | 2.20x |
| Largest loan at 1.50x DSCR (with manager) | $627,782 |
The deal passes. Now suppose the listing’s SDE was used instead and two add-backs turn out to be false. Every dollar of SDE that disappears comes straight out of the coverage. This is why lenders rebuild SDE from tax returns, and why you should do it before they do.
What lenders ask for
- Three years of business tax returns and interim financials.
- The purchase agreement or LOI and a sources-and-uses table.
- Your personal financial statement (SBA Form 413), tax returns, and resume.
- A business plan and projections that tie to historical numbers.
- The lease, and evidence it covers the loan term or can be extended.
- A business valuation when the deal requires one.
Why SBA loans for acquisitions get declined
- Tax returns show lower earnings than the listing.
- DSCR is too thin after a market salary for the operator.
- The buyer does not have relevant management experience.
- The equity injection is not documented or is borrowed.
- The lease ends before the loan does.
FAQ
How much down payment do I need to buy a business with an SBA loan?
At least 10% of the project cost under current SBA rules. A seller note on full standby can cover up to half of that 10%.
Can I buy a business with an SBA loan and no money?
Not under current rules: the buyer must inject equity. Some buyers combine their own cash with a standby seller note; see seller financing a business.