How to finance buying a small business: SBA loans, seller notes and your own cash

The usual capital stack

Think of the purchase price, working capital and closing costs as one total project cost, paid for in layers.

• Buyer equity: your own cash, and sometimes money from family or minority investors.
• Senior loan: most often an SBA 7(a) loan made by a bank or other approved lender.
• Seller note: the seller lends part of the price back to you and is repaid over time.

How SBA 7(a) acquisition loans work

The SBA does not usually lend directly; it guarantees part of a loan made by an approved lender, which lets the lender accept longer terms and smaller down payments than a conventional business loan. The maximum 7(a) loan is $5 million. Under the SBA's current lending rules (SOP 50 10 8, effective June 2025, with technical updates since), a buyer acquiring a business generally must inject at least 10% of the total project cost.

• A seller note can count towards part of that injection — up to half — only if it is on full standby, meaning no payments during the SBA loan term.
• Owners of 20% or more of the buying company are generally required to personally guarantee the loan.
• SBA rules change regularly; confirm the current requirements with an SBA-experienced lender before you sign an LOI.

What lenders look at

Lenders underwrite the business's historical cash flow, not your projections, and they want a cushion between that cash flow and the new debt payments. Many look for coverage of roughly 1.25 times annual debt service or more.

• Three years of business tax returns and recent interim financials.
• Your personal financial statement, credit history and relevant management or industry experience.
• A transition plan showing how customers and key staff will stay after the sale.
• Collateral: business assets, and sometimes personal real estate.

Seller financing on its own terms

Outside the SBA equity rules, a seller note is also a signal: a seller willing to be repaid from future profits believes in the business. Negotiate the interest rate, term, any standby period and what happens if the business underperforms.

Other ways buyers raise money

Conventional bank loans, outside investors and home-equity borrowing all exist, and each moves risk somewhere different. Using retirement funds through a rollover for business start-ups (ROBS) is legal but complex and has drawn IRS compliance attention; get specialised legal and tax advice before considering it.

Financing mistakes that sink new owners

Most acquisition failures are financing failures in disguise: the business could not carry the debt through one slow year.

• Borrowing the maximum the lender approves rather than what the worst year can support.
• Forgetting working capital, so payroll depends on next week's receivables.
• Underestimating your own living expenses during the transition.
• Signing personal guarantees without understanding what assets are exposed.