SBA loans for buying a business, in plain English

If you want to buy an established small company and you don't have the whole price in cash, the money will often come from an SBA loan. It offers a small down payment and a long time to repay. It also comes with a lot of rules, and those rules decide how big a company you can buy, how much cash you need and what you sign personally.

Here's how it works for buying a whole business. The rules come from the SBA's lending manual, SOP 50 10, whose current version (8.1) applies to loans given an SBA loan number on or after October 1, 2026. The SBA revises it from time to time, so ask your lender which version covers your loan.

What an SBA loan is

The Small Business Administration doesn't hand you the money. A bank or another approved lender makes the loan, and the SBA guarantees part of it: up to 75% for loans over $150,000. That guarantee is why a lender will finance things it otherwise wouldn't, like the reputation of a company you've never run.

The program used for buying businesses is called 7(a), and its loans go up to $5 million.

SBA backing is only for borrowers who couldn't get the same loan on reasonable terms without it. That's usually true of a business purchase: ordinary bank policy rarely allows the long repayment period or the amount a buyer needs.

The 10% you put in

When you buy a company you don't already own, the SBA requires you to put in at least 10%, and for this kind of purchase the lender can't reduce or waive it. Strictly, the SBA measures the 10% against the whole project, which can include closing costs and working capital (money to run the business day to day) rolled into the loan. So your lender's exact number may come out a little above 10% of the price.

Where that money can come from:

• Your own cash, including money someone gives you. Gifts are allowed, but a gift letter alone isn't enough: the lender wants to see the money in the bank.
• Borrowed money, with a condition. A personal loan, such as a home equity line, counts only if you can show it will be repaid from something other than the business. The salary the business will pay you doesn't qualify.
• The seller, for up to half. A loan from the seller can cover up to half of the 10% if it's on "full standby": no payments of principal or interest for the whole life of the SBA loan. Money from investors who own less than 20% and don't control the company also counts toward this half.

Before the loan is funded, the lender has to verify the money: a bank statement covering at least 30 days from the account it comes from, and proof that it moved into the purchase.

For planning, we use 10% down plus about 4% for closing costs, so your cash covers about 14% of the price. A company priced at $1 million needs about $140,000 of your cash.

Ten years to pay it back

An SBA loan to buy a business is paid back over no more than 10 years, in regular payments with nothing large left at the end. If the purchase includes the company's building, the real estate part can stretch to 25 years.

The lender sets the interest rate, but the SBA caps it. For loans over $350,000, a variable rate can be no more than the prime rate plus 3 percentage points. Our examples use about 10.25%. At that rate over 10 years, every dollar you borrow costs about 16 cents a year. Borrow $900,000 and you'll pay about $144,000 a year.

SBA rules don't allow the lender to charge points, origination fees or prepayment fees. The SBA's own early-payment fee applies only to loans of 15 years or more, so a 10-year purchase loan can generally be paid off early without a penalty (check your loan documents). Expect to pay the SBA's guaranty fee (a percentage of the guaranteed part, which lenders may pass on to you), plus costs like the business valuation.

What you sign personally

• A personal guarantee. Anyone who will own 20% or more of the business must personally guarantee the whole loan, without a limit. If the company can't pay, you can be made to. Spouses can be included: if a married couple together owns 20% or more, each spouse who owns part guarantees the whole loan.
• Collateral, possibly your home. The lender takes a lien on the business's assets, a legal claim on them if the loan isn't repaid. Those assets often don't cover the loan, because much of the price pays for goodwill (the value of the name, customers and reputation). When they don't, SBA rules require the lender to take available equity in real estate the 20% owners hold in their own names, such as your house, and to consider a home owned jointly with a spouse, unless the property has less than 25% equity.
• Life insurance. If the loan isn't fully covered by collateral and the business depends on you as its one active owner, SBA rules require insurance on your life for at least the uncovered amount. Otherwise it's up to the lender's own policy, so expect the question.

Who can borrow

The company must be a for-profit business operating in the United States and small by the SBA's size standards, which are set for each industry by yearly revenue or number of employees. Under the current manual, every owner and every required guarantor must be a U.S. citizen or U.S. national whose main home is in the United States. This rule has changed more than once recently, so confirm it with your lender.

The seller has to step away: after a full purchase they can't stay on as an owner, officer or employee, though the business can pay them as a consultant for up to 24 months in total.

What the lender looks at in you

The lender is betting that you can run this company. Expect questions about:

• Your experience. The lender has to describe your experience in the industry or a related one, and how the business will be managed day to day.
• Your credit. They'll pull credit reports for you and any other guarantor.
• What you own and owe. Every guarantor fills out a personal financial statement.
• Your salary. The pay you plan to take has to cover your living costs.

What the lender looks at in the company

• Three years of history. The lender works from the last three year-end statements (the most thorough version available, down to the tax returns), plus this year so far, compared with the same months last year.
• Tax returns checked with the IRS. The lender gets the seller's tax transcripts directly from the IRS and reconciles them with what the seller provided. Income that isn't on the returns doesn't help you.
• Room to spare. For a first purchase, SBA rules require the company's earnings, after a fair salary for you, to be at least 1.25 times the yearly payments on all its debt, including any seller note being paid. The test uses the last full year or the average of the last two, and your plans to grow the company don't count.
• An independent valuation. If the price, not counting real estate, is over $350,000, the lender must get a valuation from an accredited business appraiser it hires. If you agree to pay more than the valuation supports, the gap has to be covered by equity (your money, or a seller loan on full standby), not by a bigger loan.
• A deeper check on bigger deals. At a price of $3 million or more, the lender also needs a quality of earnings report: an independent financial professional's detailed check that the profits are real and likely to last.
• A visit. The lender has to visit the business you're buying.

What to do this week

1. Add up the cash you could really put in: savings, money you might be given, and nothing you'd repay from your new salary.
2. Run the 14% test. Divide your cash by 0.14 to see the most a lender's math would let you pay. Then plan to buy below that, so you have money left after closing.
3. Talk to two or three SBA lenders that regularly finance business purchases. The SBA's Lender Match tool on sba.gov is one way to find them. Ask how they'd view your experience and what they'd need from you.
4. Start your paperwork: a resume showing the people and money you've managed, a personal financial statement and your recent personal tax returns.

None of this is a loan approval. Lenders apply the rules with their own judgment, so confirm the details with yours, and have an accountant and an attorney review any deal before you sign.