Financing a business acquisition: SBA loans and the alternatives

Buying an existing business is one of the most common ways owners grow. The financing is rarely one loan. It is usually a stack of sources, each with its own rules.

SBA 7(a) loans

The SBA 7(a) program is often the starting point for acquisitions. The SBA guarantees part of the loan, which lets lenders offer longer terms than a conventional business loan. Key features:

• Long repayment terms, which keep the payment manageable.
• Can finance goodwill, equipment, working capital, and real estate in one loan.
• Requires a personal guarantee from owners of 20% or more.
• Requires a cash injection from the buyer, and the lender will look closely at where it comes from.

The program has size limits and eligibility rules, and lenders apply their own credit standards on top of the SBA's.

Seller financing

Many sellers carry a note for part of the price. It reduces the cash the buyer needs and keeps the seller invested in a smooth transition. When combined with an SBA loan, the seller note usually has to meet specific standby and subordination terms.

Conventional bank and non bank loans

Larger acquisitions, or buyers with strong existing businesses, may use conventional term loans and lines of credit. They can close faster and carry fewer program rules, but may require more equity or a shorter term.

Equity

When debt alone does not cover the price, buyers bring in equity: their own, a partner's, or an outside investor's. Equity reduces the debt load and can make the deal possible, at the cost of sharing ownership.

What lenders want to see

• Three years of the target's tax returns and current financial statements.
• A quality of earnings view: what the business really earns after adjustments.
• The buyer's industry and management experience.
• A clear plan for the first year after closing.
• The source of the buyer's equity.

Our Business Credit and SBA checklist lists the documents in detail.

How we help

We help buyers design the capital stack for an acquisition, prepare the package, and place it with lenders who finance that kind of business. Start a conversation before you sign a letter of intent, when the structure is still flexible.

All financing is subject to lender underwriting and approval. SBA program terms are set by the SBA and may change.