Financing
How does an SBA loan work when you buy a business?
Short answer
An SBA 7(a) loan is a bank loan that the U.S. Small Business Administration partly guarantees, which lets lenders finance business purchases they would otherwise pass on. Loans go up to $5 million, with terms up to 10 years for the business and up to 25 years for real estate. On a purchase, expect to put in at least 10% of the project cost and to sign a personal guarantee.
How to, at a glance
- Check your credit and gather personal tax returns
- Talk to two or three SBA lenders early
- Save at least 10% of the project cost
- Find a business whose cash flow covers the loan with room to spare
- Order third party reports early; they are often the slow step
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- How long does an SBA loan take to close?
- It depends on the lender and the deal. Have your documents ready and order third party reports early, because they are often the slowest step.
- Can I use an SBA loan for a gas station or hotel?
- Yes, both are commonly financed with SBA loans. Gas stations add environmental review, and hotels often need franchisor approval of the new owner.
- Do I need experience in the industry?
- It helps, and lenders ask. Strong management experience in another field, or keeping trained staff on, can make up for it.
The basics
| Item | What to expect |
|---|---|
| Loan size | Up to $5 million |
| Term | Up to 10 years for the business, equipment and working capital; up to 25 years for real estate |
| Your cash in | At least 10% of the total project cost on a change of ownership |
| Seller note | Counts toward your cash in only on full standby, and for no more than half of it |
| Cash flow test | Since October 1, 2026, first time acquisitions are reported to need past cash flow covering loan payments at least 1.25 times |
| Guarantee | Owners of 20% or more personally guarantee the loan |
| Rate | Set by the lender within SBA maximums, usually tied to the prime rate |
From the SBA and the law firm sources below. Lenders can ask for more than the SBA minimum.
What the lender looks at
- Cash flow. Can the business pay the loan from its own earnings, with room to spare? Lenders read three years of tax returns and a current profit and loss statement.
- You. Credit, relevant experience, and whether you will run the business yourself.
- Your cash in. Where it comes from, documented.
- The price. Whether the price is supported by the earnings. A business valuation is common.
How to prepare before you find the business
- Pull your credit and fix errors early.
- Gather two to three years of personal tax returns and a personal financial statement.
- Write a one page summary of your experience. Managing people, cash or a similar business all help.
- Talk to two or three SBA lenders. They differ a lot on which industries they like.
Where SBA does not fit
Some deals do not meet SBA rules: a seller who will not provide clean tax returns, a business that earns too little to carry the loan, or a buyer who will not run it. In those cases conventional bank loans, seller financing, or all cash are the usual paths.
Sources
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