How to Buy a Business with an SBA Loan

Buying a Business with a Loan Isn’t as Simple as You Think

You’d be surprised how many people wake up one day, scroll through BizBuySell or look at a local listing, and start wondering, Could I buy this business with a loan? They see the cash flow, do some quick math, and figure, “If the business is doing $200K in profit, surely a bank would lend me the money to take it over.”

It makes sense in theory. But when they start talking to lenders or brokers, reality hits hard. The question that always comes next is, How much do I need to bring to the table?

If you’ve never bought a business before, here’s what you need to know. Most SBA lenders want you to have at least ten percent of the total deal value as a down payment. And depending on the structure, the risk, and how the deal is presented, some will ask for more.

So when a seller says they want twenty percent down, they’re not being greedy. They’re getting ahead of what the bank is going to require anyway. Banks want to see the buyer have real equity in the transaction. Not just because it reduces the risk, but because it shows you’ve got skin in the game. If everything’s borrowed and you don’t have a dollar of your own in it, the bank’s not going to trust that you’ll fight to keep the business afloat if things get tight.

This isn’t like buying a car or applying for a credit card. Buying a business is a complex deal. The lender is going to look at the financial history of the business, the experience of the buyer, and how the whole thing is being structured. If the math doesn’t work, the answer is no.

How SBA 7(a) Loans Are Structured for Acquisitions

If you’re using an SBA 7(a) loan to buy a business, the government is guaranteeing a portion of the loan for the lender. That guarantee gives banks more flexibility to fund small business transactions. But don’t confuse flexibility with leniency.

Even with the SBA involved, the lender is still the one doing the underwriting. They want to see that the business being bought has at least two or three years of financials, with enough cash flow to cover the loan payments after expenses. They want to know the buyer has relevant experience. And they’re going to ask for collateral, even if it’s not required to fully secure the loan.

The down payment is a non-negotiable piece of that equation. SBA rules say you need at least ten percent equity in the deal. In some cases, a portion of that can come from the seller holding a note. But there’s a catch. For the seller’s financing to count toward your equity, that note has to be on full standby. That means the seller agrees not to take any payments from you on their note until the SBA loan is fully paid or until the bank allows it. And most sellers don’t like that, because it puts them at the back of the line.

What that means for you is simple. You’re probably going to need to come to the table with at least five or ten percent in actual cash. No workarounds. No tricks. Real money. That’s how you show the lender you’re serious. And it’s also how you keep the seller engaged in good faith if they’re carrying any paper at all.

Why Personal Guarantees Always Matter (And What You’re Really Signing Up For)

One of the most common misconceptions first-time buyers have is that the SBA guarantee somehow protects them personally. You’ll hear someone say, “Isn’t the SBA backing the loan? Doesn’t that mean I’m not on the hook?”

No. That’s not how it works.

The SBA guarantee protects the lender, not the borrower. If you default and the loan goes bad, the SBA will reimburse the bank for a portion of their loss. You’re still responsible for repaying the full balance. And if you signed a personal guarantee, which you will on every SBA loan, you’re personally liable for the debt if the business can’t make the payments.

That’s not just a formality. It means if things go sideways, the lender can come after your personal assets. That might include your bank accounts (only when you pledge the cash as collateral in it), your home equity (again, when that has been pledged – No surprises here), or anything else that isn’t protected that has been included in the collateral pool, BEFORE YOU SIGN. If the business fails, you can’t just walk away. You’re still on the hook.

Most buyers don’t think about this upfront. They’re focused on the opportunity, the upside, the freedom of owning a business. And that’s fair. But if you sign that loan without understanding what it means to personally guarantee it, you’re taking on more risk than you realize.

There’s no way around this. You can’t set up an LLC to shield yourself. The bank will still require the personal guarantee. That’s the rule. That’s the deal. And if you’re not comfortable backing the loan yourself, you’re not ready to take it on.

That doesn’t mean you shouldn’t buy the business. It just means you should do it with your eyes open. When you use a loan to acquire a business, you’re making a commitment that follows you home. If you’re ready for that responsibility, then you’re ready to start structuring the deal properly.

Before signing any loan docs, you may want to consult tax and liability experts like Taxfyle or 1-800Accountant to understand your personal risk.

The 90 Percent Loan-to-Cost Reality, and Why Seller Notes Still Matter

There’s a lot of confusion about how much down payment is actually required to buy a business with an SBA loan. You’ll hear sellers ask for twenty percent. Some brokers will say fifteen is typical. And then buyers show up thinking ten percent is a guaranteed number because that’s what they saw in an SBA guideline.

Here’s how it really works.

Most SBA lenders underwrite toward a 90 percent loan-to-cost structure. That means they want to finance up to ninety percent of the total project amount. That includes the business purchase price, working capital, closing costs, and anything else eligible that’s part of the transaction. The borrower is expected to bring in the other ten percent as equity.

When the deal is clean, the business is producing solid cash flow, and the buyer is qualified, lenders will usually stick to that 90 percent target. This is common and achievable. It is how most of these deals are structured when they move forward without issue.

Where things change is when there are concerns. If the business has inconsistent financials, if the buyer has no relevant experience, or if the transaction has unusual elements, the lender may push for more cash equity to reduce risk. They may still want to stay close to 90 percent total financing, but they will want a higher portion of the equity coming in as actual cash instead of structured alternatives.

This is where seller financing can play a role. A seller carry note shows the lender that the seller has a vested interest in the success of the business after the sale. It keeps the seller engaged during the transition and sends a message that they believe the business will keep performing.

If that seller note is on full standby, meaning the seller agrees to not receive any payments on it until the SBA loan is fully paid off or until the bank agrees to release the standby, then part of that note can sometimes count toward the borrower’s required equity. Even in those cases, lenders will usually want the buyer to contribute at least five percent of the project in actual cash.

So while 90 percent financing is the standard approach, it is not a guarantee. The way that ten percent equity is made up, and how much of it can come from a seller note, depends on the quality of the deal and how comfortable the lender is with the overall structure.

And because every lender interprets risk a little differently, shopping lenders can absolutely change the outcome. One lender may ask for fifteen percent equity while another is fine with ten because of how they view the cash flow, the industry, or the buyer’s experience.

The structure is flexible, but the deal still has to make sense. If it does, 90 percent loan-to-cost is not just possible, it’s often the starting point.

What Lenders Are Really Looking for in a Business Acquisition Deal

Most buyers think getting an SBA loan is about convincing the bank to believe in them. That if they can just explain why they’re a good fit or how passionate they are, the lender will take a chance. But lenders aren’t in the business of taking chances. They’re in the business of assessing risk.

What they care about most is the business itself. Can this business, as it stands today, support the debt it’s about to take on? Can it continue operating under new ownership without falling apart? Is there enough margin left after debt service to keep the lights on, pay employees, and handle unexpected issues?

They start with the financials. They want to see two or three years of consistent revenue and profit. Not just big revenue, but reliable bottom-line cash flow. That’s what the loan payments will be drawn from. If the numbers are erratic or the books are messy, the deal probably stalls right there.

Then they look at the buyer. You don’t have to be a perfect match, but you do need to make sense. If you’re buying a logistics company and your whole background is in food service, the lender is going to ask how you plan to bridge that gap. If you’ve never managed staff, dealt with inventory, or handled vendor relationships, they’ll wonder what happens when problems show up on day one.

Next comes the structure. Is the down payment sufficient? Is there a seller note in place that helps stabilize the transition? Does the deal include working capital so the business doesn’t run out of cash right after closing? Are the tax returns, profit and loss statements, and balance sheets all aligned, or are there gaps that will require explanations?

And finally, they look at post-close risk. Are there customer concentration issues? Is the business owner the face of the company, with no second-in-command? Are the financials too dependent on add-backs that may not hold up? All of that gets picked apart before you even get to underwriting.

When a lender sees a deal where the business has clean numbers, the buyer has relevant experience, and the structure keeps everyone aligned, it becomes an easy file to move forward. But if even one of those pieces is missing, it becomes a much harder sell.

You’re not trying to sell the dream. You’re trying to prove the reality. Lenders don’t need the pitch. They need the facts. If you give them the right story, told clearly and backed by documentation, you’ll get traction.

To find multiple lender matches tailored to your deal, use platforms like Lendio or Fundera.

How to Actually Prepare for an Acquisition Loan

If you’re serious about buying a business with a loan, you can’t just wait until you find the right listing and then start scrambling. You need to prep like you’re already under contract, because once a deal gets moving, the clock starts ticking fast.

Start with your personal financials. Every SBA lender is going to ask for a full personal financial statement. That includes your assets, liabilities, monthly debt obligations, and a breakdown of your liquidity. You’ll also need the last three years of personal tax returns. If you’re missing any of that or it’s disorganized, now’s the time to fix it.

Next, document your experience. The lender will want to know who you are, what you’ve done, and why you’re qualified to run the business you’re buying. This isn’t a resume for HR. It’s a clear explanation of your background, tied directly to the business you’re acquiring. If you’re buying a manufacturing company and have managed operations or teams before, say so. If you’ve never run a business but you’ve led a division or built systems, explain that. The lender needs to feel confident that you’re not walking into something completely foreign.

Then, understand your liquidity position. You’ll need real cash to make a down payment and cover any immediate post-close needs. Lenders won’t just take your word for it. They’ll look at your bank statements and investment accounts to confirm what you have. If most of your net worth is in retirement accounts, you need to know how that will or won’t count.

On the deal side, get familiar with what quality looks like. If you’re working with a broker, push for full financials up front. That means tax returns, interim P&Ls, balance sheets, and a clear seller add-back schedule if they’re presenting an adjusted EBITDA figure. If you’re flying solo and talking directly to sellers, learn to ask the right questions about revenue stability, customer mix, key staff, and the seller’s role in the day-to-day.

The cleaner your deal and the tighter your documentation, the faster your loan can move. But if you show up unprepared and expect the lender to guide you through every step, you’ll lose time and possibly the deal. Preparation isn’t about chasing perfection. It’s about respect—for the process, for the lender’s time, and for the size of the commitment you’re about to make.

Use software like QuickBooks or Xero to maintain lender-ready financials and make your acquisition package airtight.

Additional Reading:

5 Myths About SBA Loans Every Founder Should Know — debunk misconceptions that often block buyers before they even start.

Business Loans with Bad Credit: What You Need to Know — address a common follow-up fear after hearing about down payment and seller notes.

Broke or Billionaire by 2030 | LoL #5 — drive urgency about buying a cash-flowing asset now vs. waiting.