Where the down payment for a business purchase comes from

With an SBA loan, you need to put in at least 10% of a business's price, plus closing costs. We plan on about 4% for those, so your cash covers about 14% of the price. On a $1.2 million company, that's about $168,000.

If that isn't sitting in a checking account, where does it come from, and which sources will a lender actually count? The rules below come from the SBA's current lending manual. If you haven't read it yet, our plain-English guide to SBA loans covers the basics.

Two kinds of money, as the SBA sees it

The SBA sorts down payment money into two groups.

• Money that can cover all of it: cash that isn't borrowed (including gifts), money borrowed personally that you can repay from something other than the business, and costs you've already paid toward the purchase that the lender can verify, such as the business valuation.
• Money that can cover only half: a loan from the seller or anyone else on "full standby" (no payments at all until the SBA loan is repaid), and investments from people who will own less than 20% and won't control the company.

So on a deal that needs $120,000 down, at least $60,000 has to come from the first group.

The lender checks your sources before closing. Expect to show a bank statement covering at least 30 days from the account the money comes from, and proof that it moved into the purchase. A gift letter or a promissory note on its own isn't enough. Large recent deposits will need an explanation, so keep a paper trail as you move money around.

Savings and investments

This is the simplest source. If you sell investments to raise cash, you may owe tax on the gains, and the sale can push you into a higher bracket for that year. Ask your accountant before you sell, and leave enough time for the money to settle and show up on a statement.

Gifts from family

Gifts count fully, as long as they really are gifts, with nothing to repay. The lender will want the gift documented and the money traced from the giver's account to yours.

The giver has a tax question of their own. Under IRS rules, someone who gives more than the annual exclusion ($19,000 per recipient for 2026) generally has to file a federal gift tax return. Whether any tax is owed depends on a separate lifetime exemption, which is $15 million for 2026. The giver should check with their own accountant.

Borrowing against your home

A home equity loan or line of credit can count fully, but only if you can show it will be repaid from something other than the business. The salary the business pays you doesn't qualify. In practice, that often means another household income, like a spouse's paycheck, large enough to cover the payments.

Think hard about the risk. Your home would be on the line twice: once for the home equity loan, and possibly again, because if the business assets don't fully secure the SBA loan, the lender must take available equity in real estate owned by anyone with 20% or more of the company.

Retirement money

There are three ways to use retirement savings, and they're very different.

Taking a withdrawal. From a traditional account, the money is taxed as income, and before age 59½ the IRS generally adds a 10% additional tax on the taxable amount. A large withdrawal can lose a big share to taxes before it reaches the deal.

Borrowing from your 401(k). If your plan allows loans (plans don't have to), the IRS limits you to the lesser of $50,000 or the greater of $10,000 or half your vested balance. Loans generally must be repaid within five years. If you leave the employer that sponsors the plan, an unpaid balance can become a taxable distribution. And the SBA's rule on borrowed money still applies: the loan has to be repaid from something other than the business.

A rollover for business start-ups (ROBS). This one needs the most care, so here it is plainly. You form a new C corporation (a company taxed separately from you), and the corporation sets up its own retirement plan. You roll money from an existing retirement account into the new plan, and the plan uses it to buy stock in your corporation. The corporation now has cash for the down payment, and a rollover done correctly isn't taxed.

The SBA allows it, with conditions. The lender needs an IRS letter confirming the plan's terms meet the tax rules, the corporation's formation and stock purchase documents, and your certification that the plan follows IRS and Labor Department rules. Loan money can't pay the plan's setup costs.

The IRS has looked closely at these arrangements. It doesn't call them abusive tax avoidance, but it does call them questionable, because they may benefit only one person. It lists ways they can go wrong: missing the annual Form 5500 filing the plan still needs, valuing the company's stock badly, prohibited transactions, and plan rules that unfairly shut out other employees. A mistake can disqualify the plan, with tax consequences for you. In its compliance project, the IRS found that most ROBS businesses had failed or were on the road to failure.

There are other costs. Companies that set these up charge for it, the plan has yearly requirements, and a C corporation's profits are taxed inside the company and again when paid out to you as dividends. Most of all, you'd be putting your retirement into a single small company, the same one your loan depends on.

If you're considering a ROBS, talk to a CPA and an attorney who works with retirement plans, and not only to the company selling the setup.

Partners and investors

A working partner who owns 20% or more brings cash that counts fully. They'll also have to personally guarantee the loan, like you, and meet the SBA's ownership rules.

Passive investors who own less than 20% and have no control bring money that counts only toward the half. If their money is part of your required down payment, the company can't pay them distributions beyond what covers their taxes on its profits until the SBA loan is repaid. Make sure they understand that before they write a check, and put every arrangement in writing with an attorney's help.

The seller

A seller can lend you up to half of the required down payment, if their note is on full standby: no principal or interest payments for the life of the SBA loan, which on a purchase loan can be up to 10 years. Interest can build up and be paid after the bank is repaid. That's a long wait, and many sellers won't want it, but it's worth asking about, especially if the seller wants to help a particular buyer succeed.

Don't put in everything

The minimum isn't a target. After closing, you'll want cash for working capital, surprises and your own living costs. And if you have far more cash than the deal needs, an SBA lender has to consider whether you could fund more of it yourself. The rules let you keep reasonable amounts set aside for things like medical costs, education and retirement. Talk that through with your lender early.

What to do this week

• List every possible source, with the amount and which of the SBA's two groups it falls into.
• Check your 401(k) plan's loan rules with the plan administrator.
• If family might help, have the conversation now, and agree in writing that it's a gift.
• Start keeping clean statements for every account the money will come from.