Key Insight
The SBA 7(a) program exists precisely for SMB acquisitions — it's the most powerful financing tool in the market, and it's widely misunderstood by both buyers and sellers.
How SBA 7(a) Acquisition Financing Works
The SBA doesn't lend money directly — it guarantees loans made by SBA-approved lenders (banks and non-bank lenders). The guarantee reduces lender risk, which allows lenders to approve deals they otherwise wouldn't.
Key parameters for acquisition financing:
- Maximum loan amount: $5 million
- Buyer equity injection: Minimum 10% of the total project cost (acquisition price plus working capital)
- SBA guarantee: 75-85% of loan amount, depending on loan size
- Loan term: Up to 10 years for business acquisitions (25 years for real estate)
- Interest rate: Variable, tied to Prime or SOFR + spread — typically Prime + 2.75% to 3.75%
SBA Eligibility Requirements
The business must be:
- A for-profit business operating in the United States
- Within SBA size standards for its industry (generally under $7.5M in net income or under a revenue threshold)
- Unable to obtain conventional financing on reasonable terms (effectively satisfied by the nature of SMB deals)
The buyer must:
- Have relevant management experience or industry background
- Meet creditworthiness standards (typically 650+ credit score minimum, though lenders vary)
- Provide a full personal financial statement
- Not already own a business that would conflict
The 10% Equity Injection Rule
The 10% equity injection is the minimum — lenders may require more. On a $1M acquisition, the buyer must inject $100K. This can come from personal savings, 401(k) rollover (ROBS structure), or gifts from family.
Seller financing can count toward the injection in some structures — but there are rules. SBA rules allow seller financing to count toward equity injection if it is on full standby (no principal or interest payments for two years). If the seller note is not on standby, it typically does not count toward equity injection.
What Kills SBA Fundability
- Customer concentration: A single customer above 25-30% of revenue makes most lenders uncomfortable
- Declining revenue: Three-year revenue trend matters; consistent declines are often disqualifying
- Below-market owner comp: If the business can't support market-rate management compensation and still service the debt, it won't pencil
- Certain industries: Cannabis, gambling, lending, and others are SBA-ineligible
An SBA lender will stress-test whether the business can service the acquisition debt from cash flow. A $1M loan at 9% over 10 years costs roughly $12,700/month ($152,400/year). The business must generate enough SDE — after paying a market-rate manager — to cover this payment with a cushion. If SDE is $280K and management replacement costs $100K, that leaves $180K — enough to service $152K in annual debt with a 1.18x DSCR. Below 1.25x DSCR, most SBA lenders get uncomfortable.
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