Many business owners take on an SBA loan to cover the costs of a small business acquisition. Named after the Small Business Administration that guarantees them, these loans enable buyers to finance up to 90% of the costs of acquisition.

What kinds of loans does the SBA offer people who want to take on a business acquisition?

The SBA offers 7(a) loans to small business owners to cover up to 90 percent of their startup costs, working capital, and equipment needs. Many use these loans to help finance the purchase of a business.

Depending on your needs and the level of financing you require, you may consider one of the three types of 7(a) loans that the SBA offers:

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The SBA also offers 504 loans to cover the purchase of existing buildings, the purchase of land or land improvements, the construction of new facilities, the renovation of existing facilities, and the purchase of long-term machinery. Unlike 7(a) loans, 504 loans must be used for a specific purpose, which cannot include working capital or inventory or consolidating debt.

While 7(a) loans are provided by SBA-approved lenders, 504 loans are granted through a collaborative effort from participating lenders, SBA-regulated certified development companies (CDC), and borrowers. In most 504 arrangements, the SBA lends 40 percent of the total project costs. Lenders provide 50 percent of the total project costs, and borrowers provide the remaining 10 percent.

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Which loan program is right for me?

Whether you choose one of the 7(a) options or the 504 loan will depend on what you plan to do with the funds you raise. If you’re planning to raise capital for a specific real estate project, such as buying your target business’s facility or engaging in renovations, you’ll likely choose a 504 loan. If you plan to fund other startup costs or working capital needs, you’ll choose a 7(a) loan or another financing option.

It’s important to note that some SBA loans include additional fees and prepayment penalties. You should speak with a lending officer before proceeding with an SBA loan to make sure that it’s a suitable choice for your needs and that your business is eligible for SBA funding.

What are the qualifications for a 7(a) loan?

To qualify, you must be attempting to purchase a small, for-profit business that’s based in the United States. You must be able to make a down payment, equal to 10-20% of the purchase price, and have exhausted other options for financing. Additionally, you and the business you’re acquiring should be on solid financial footing: Applicants should have a credit score greater than 640, and businesses that will be acquired should be able to demonstrate at least two years of profitability and growing annual revenues. Lenders may also require a debt service coverage ratio of at least 1.15 to ensure that the business has enough cash on hand to service debt, interest, and lease payments.

You can find additional requirements for the 7(a) loan options here and the 504 loan here.

At present, some types of businesses are ineligible for SBA loans. You can study the current list of ineligible businesses at SBA.gov.

Where do I go to attain one of these loans?

Many commercial and community banks issue all three forms of 7(a) loans, and they can guide you through the steps you’ll need to take to start the 504 loan process. Most will direct you to the appropriate contact at a certified development company (CDC) in your region.

Some online banks also offer these loans. GoKapital and Commercial Loan Direct are two popular lending services many business owners use to access SBA financing.

What should I do before applying?

There are four steps you should take before applying for an SBA loan:

1	Make sure your finances are in good order. You and any partners who will hold at least a 20 percent ownership share in the business should gather three years of tax returns, determine your net worth, and ensure that your credit scores are 650 or greater. If the business you already own will be acquiring the new entity, you may also be required to provide three years of financials and tax records.
2	Develop a plan for covering the down payment. As a borrower, you’ll be expected to make a down payment that equals at least 10 percent of the business’s acquisition cost. If you’re using seller financing as a second form of financing, you may be able to reduce the down payment to 5%. Read our article, Why Seller Financing Can Be a Great Source of Capital, to learn more about this option. Many applicants leverage the assets of another business that they own to accumulate the cash that’s needed for a down payment. Others dip into their personal savings, stock accounts, home equity accounts, or retirement funds. You may wish to speak with a certified public accountant (CPA) who can help you understand the risks of using each of these sources of funding. Would you like to connect with an accountant? Check out some of our favorite firms here:   Play Video Reconciled Your Business Deserves the Very Best Reconciled is an award-winning organization and one of the fastest-growing accounting firms in the country. Their team of entrepreneurship gurus, e-commerce pros, and tech-loving cloud accounting specialists look at your business holistically and help you analyze your spending, measure costs, and find opportunities to enhance margin and profitability, along with taking on your day-to-day bookkeeping. Want to learn more? Click the connect button below for an introduction. I'm ready to connect Play Video Xendoo Be Tax Ready All Year Long With Xendoo, you can access a dedicated team of expert CPAs and accountants who provide monthly bookkeeping, tax preparation and filing, and tax consulting, three services that will help you stay on top of all your financial needs. Their team can also help you with your personal tax returns, too. You can explore their plans with totally transparent pricing by following the link below, and for a limited time, you can try their online bookkeeping service free for one month. Restrictions may apply. See Xendoo’s site for details. Tell me more Play Video 1-800Accountant Say Hello to Better Online Accounting Business owners love 1-800Accountant. Here’s why. First, the service pairs you with a CPA who is an expert in your state and industry and can answer the tough questions you have about your business. Second, while many others charge by the hour, or worse, by minute, 1-800Accountant sets you up with an affordable, flat-rate pricing plan so you always know what you’ll be paying. Follow this link to try 1-800Accountant for 30 days with a money-back guarantee. Let's get started
3	Select an SBA loan provider. You can work with any commercial, regional, or community bank that offers this service. Of course, you may want to choose one with a team dedicated to serving small businesses. It’s also important to choose a bank that offers favorable terms and competitive interest rates. GoKapital and Commercial Loan Direct are popular SBA lenders. If you need help finding a lender, visit SBA.gov and use their Lender Match tool.
4	Gather the documents you’ll need to complete the application. You’ll need to gather or create personal and business documents to demonstrate your business’s viability, your creditworthiness, and your ability to run the business effectively. Key items include: Three years of personal tax returns for you and any partner holding at least a 20 percent stake in the business Documentation of your personal, your business’s, and the business you’re acquiring’s assets and liabilities A signed letter of intent (LOI) to buy the business you plan to acquire Up to three years of your business’s tax returns (if you plan to involve your current entity in the transaction) Up to three years of your target business’s tax returns Three years of both business’s financial statements, including profit-and-loss statements, balance sheets, and cash flow statements A debt schedule that lists your business’s debts and liabilities and, if you will be acquiring the debt of the new business, that business’s debts and liabilities Proof of the business licenses and registrations that are required for you to conduct business, which may include articles of incorporation, franchise agreements, copies of contracts that you hold with vendors and key customers, and leases on the property A third-party valuation of the business A business plan that describes the company, the target market it serves, its competitive positioning, and its plans and projections for the future A resumé or other proof of your experience or ability to manage a business

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How do I apply?

Your lender will provide you with a loan application and SBA forms specific to the loan you’re seeking. These will include SBA Form 1919 and SBA Form 413 for the standard 7(a), 7(a) small loan, and SBA express. You’ll also complete SBA Form 1920 for the standard 7(a) and the 7(a) small loan. For the 504 loan, you will complete SBA Form 1244.

Your lender may offer creditor insurance, which assures that the loan will be repaid in the event of your death or incapacity. Learn more about creditor insurance in our Small Business Financing 101 article, What Is Creditor Insurance?.

Once you complete the required forms and demonstrate you can provide collateral for the loan, the lender will begin the loan underwriting process. During this time, the lender will evaluate your assets, liabilities, and managerial experience and assess the business’s financial positioning.

If your lender is an SBA-preferred lender, the team you’re working with will decide whether to approve the loan. Others will need to work through the SBA for loan approval. If your loan is approved, the lender will work quickly to distribute the funds you need to buy your target business.

How can I boost my chances of being approved?

Here are some strategies you can use to boost your odds of approval:

What else should I know about using an SBA loan for a business acquisition?

One of the conditions of an SBA loan is that the seller must fully exit the business in order for it to be eligible for funds. This means that you cannot hire the seller as an employee of the business.

The problem is that many owners offer to support the business post-sale, and this support can be invaluable. To navigate the SBA’s requirement and accept the seller’s support, consider retaining the owner as a consultant rather than an employee. Speak with an attorney to formalize this arrangement and ensure that your agreement won’t jeopardize your ability to attain financing.

Are you interested in connecting with an attorney? Click the Connect button below to get started:

What’s next?

An SBA loan isn’t your only funding option for a business acquisition. Check out this guide to find more ways to access capital, which can include term loans, asset-backed loans, 401(k) access, and seller financing:

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