SBA 7(a) loans, explained for someone buying their first business
Most small business acquisitions in the United States are financed the same way. Here is what the loan is, what it requires from you, and where buyers get caught.
What is an SBA 7(a) loan?
An SBA 7(a) loan is a loan made by an ordinary bank, where the US Small Business Administration guarantees a large share of it if the borrower defaults. The SBA does not lend you the money and you do not apply to the SBA. You apply to a bank, and the guarantee is what persuades that bank to lend against a business rather than against property. That is the entire reason the program exists: without it, very few banks would finance the purchase of a small business at all.
How much do you have to put down on an SBA loan?
At least 10% of the total project cost, and lenders frequently ask for more. This is called the equity injection. It has to be money genuinely at risk, which is why lenders trace where it came from. On a $750,000 acquisition, 10% is $75,000, plus closing costs and working capital that come out of the same pocket. Buyers who plan to spend their entire injection on the purchase price close with no cushion, and the first slow month becomes a crisis.
Can a seller note cover part of the down payment?
Yes, if the note is on full standby, and this is the most useful thing most buyers do not know. Full standby means the seller receives no payments at all until the SBA loan is repaid. Under that condition many lenders will let a seller note count toward part of the equity injection, which meaningfully lowers the cash you bring to closing. Sellers agree more often than buyers expect. Confirm the split with your specific lender before you write it into an offer, because the treatment varies.
How much can you borrow?
A single SBA 7(a) loan is capped at $5 million. With a 10% injection that puts roughly $5.5 million at the top end of a purely SBA-financed deal. Above that, buyers stack an SBA loan with a seller note, an equity partner, or conventional debt. Most first acquisitions land far below the cap, in the $250,000 to $1.5 million range.
What interest rate and term should you expect?
Rates are usually variable, set at the prime rate plus a spread the SBA caps, on a ten year term for a business with no real estate. Because the rate is variable, it moves when prime moves. Model your payment at two points above whatever you are quoted before you commit. When the deal includes commercial property, the term can stretch to 25 years, which lowers the monthly payment considerably. You can model both on the affordability calculator.
What does the lender actually check?
Two separate things: you, and the business. Buyers assume the scrutiny is mostly personal. It is not. The business has to prove it can carry the debt, and plenty of eligible buyers are declined because the business could not:
- Your credit history, usually 680 or better, and no delinquent federal debt
- Your management background, and whether it is relevant to this business
- The business's cash flow, against a debt service coverage ratio of about 1.25
- Customer concentration, because one customer worth 40% of revenue is a risk to the loan
- An independent valuation confirming the price is supportable
How long does SBA approval take?
Sixty to ninety days from application to funding, and it starts later than most buyers realise. That clock runs on top of diligence, not alongside it, unless you make it run alongside. Buyers who wait until diligence is finished before approaching a lender add two months to their own timeline. Talk to lenders while you are still reading the tax returns.
What do you personally guarantee?
Everything, if you own 20% or more of the business after the purchase. A personal guarantee means the lender can pursue your personal assets if the business fails to pay. If you own a home with meaningful equity, the lender will usually take a lien against it too. This is the clause buyers most often sign without reading, and it is the reason the diligence you do beforehand is not optional.
The documents a lender asks for, in the order they ask for them, plus the three that hold up the most files. One email, no course.
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Common questions
Can you use an SBA loan to buy any business?
No. The business must be a for-profit operating company doing business in the United States. Passive businesses such as most real estate rentals, lending and investment businesses, and businesses earning more than a third of revenue from gambling are all ineligible regardless of how good the numbers look.
What credit score do you need for an SBA loan?
There is no published minimum, but most 7(a) lenders look for roughly 680 or better. A delinquent federal debt is the harder problem: a defaulted student loan or unpaid federal tax debt will stop the application no matter what your score is.
Do different banks offer different SBA terms?
Yes, and this surprises people. The SBA sets the outer limits, but each lender sets its own appetite, spread, closing timeline and documentation demands within them. Applying to three lenders rather than one is normal and often changes both the rate and the speed.
Is there a prepayment penalty?
For 7(a) loans with terms of 15 years or more, there is a declining penalty in the first three years if you repay more than 25% of the balance. The ten year acquisition loans most buyers use typically have none.
Can you get an SBA loan with no industry experience?
The SBA does not require industry experience, but individual lenders weigh it heavily and it is a common reason for a decline. Retaining the existing manager, or having transferable management experience, is the usual way to satisfy the concern.