Introduction
Buying a business is one of the most powerful ways to build wealth, but many first-time buyers assume they need millions in the bank to make it happen. The truth is, with SBA 7(a) financing, you can buy a cash-flowing company with as little as 5% down. Whether you’re a key employee, independent buyer, or acquisition entrepreneur, this guide breaks down how SBA financing works, what lenders look for, and how to structure a deal—even if your biggest asset is the equity in your home. This guide is especially valuable if you’re researching loans to buy a business, exploring low-money-down strategies, or planning to purchase the business you already help run.
What Is SBA 7(a) Financing?
The SBA 7(a) loan program is designed to help individuals buy small businesses with government-backed financing. The SBA doesn’t lend money directly. Instead, it guarantees a portion of the loan made by an approved lender, reducing the bank’s risk.
The SBA will reimburse the bank between 70% and 90% of its loss if a borrower defaults, encouraging lenders to approve loans with more flexible terms and lower equity requirements.
Key Benefits:
– Low down payments (as little as 5% with seller participation)
– 10-year repayment terms (lower monthly payments)
– Competitive interest rates
– Ability to finance goodwill and working capital
An added buyer benefit is that the SBA lender will engage a licensed, independent business valuation firm to value the business. This is similar to how a bank hires a certified appraiser before issuing a mortgage. The lender wants to ensure the asset supports the loan amount. This protects the buyer from overpaying and ensures the transaction is grounded in fair market value.
How Much Down Payment Do I Need?
The SBA requires a minimum of 10% equity injection. The buyer contributes 5% and the seller provides a 5% standby note (a deferred payment obligation), the lender may finance the remaining 90%.
This structure is ideal for employees buying the company they already help manage. It allows them to step up from being employees to being owners with a small out-of-pocket investment while ensuring the seller is paid upfront.
Example Structure:
– Base purchase price: $1,000,000
– Working capital: $200,000
– Closing costs: $20,000
– Total project cost: $1,220,000
– Buyer down payment: $61,000 (5%)
– Seller standby note: $61,000 (5%)
– SBA loan: $1,098,000 (90%)
– Amount paid at closing to the Seller $1,098,000 (90%)
The SBA bases the equity injection requirement on the total project cost, not just the purchase price. This ensures the new owner has enough capital for immediate operational needs.
No Money Down When Expanding in the Same Industry
If a buyer already owns a business and is acquiring another company within the same focus based on the NAICS (industry) code, the SBA considers it an expansion. No down payment may be required in these cases. This is an excellent strategy for business owners looking to grow through acquisition.
Understanding SBA Interest Rates
SBA 7(a) loan interest rates are variable and typically calculated as:
Prime Rate + Risk Premium = Interest Rate
Most lenders charge Prime + 2.75%, the maximum allowed for loans. If Prime is 7.5%, your rate would be 10.25%. This rate adjusts quarterly based on changes to the Prime Rate.
While variable, SBA loans offer predictable amortization and no balloon payments.
Using Home Equity for the SBA Down Payment
One of the most common ways buyers meet the down payment requirement is through a home equity loan or line of credit (HELOC). Even if you don’t use the full amount, securing the highest possible credit line gives you flexibility and improves your financial profile.
Benefits of Using Home Equity:
– Liquidity for down payment and working capital
– Enhances borrower strength
– Draw only what you need
If your home appraises at $600,000 and you owe $375,000, you may have $225,000 in equity. Using the example from above, if you get a home equity loan for $105,000, you could use $61,000 for the down payment and have $44,000 ready to be accessed if needed. Our lending partners do not place a lien if equity is under 25%, allowing you to access funds without encumbering your home.
Why Sellers Prefer SBA-Financed
Sellers love SBA deals because they get paid at closing. Unlike installment sales, SBA-backed deals remove the uncertainty of deferred payments. This provides liquidity, minimizes risk, and allows the seller to retire or reinvest immediately.
Who Qualifies for SBA Financing?
– U.S.-based, for-profit business
– Buyer must have good credit and relevant experience
– Business must generate sufficient cash flow to cover loan payments
Industries That Fit Well with SBA Loans
– Engineering firms
– Architecture firms
– Land surveying companies
– Trade services (electricians, HVAC, plumbing)
– Professional service firms
– Manufacturers
Allen Business Advisors specializes in helping owners sell to their employees in these sectors.
Step-Up Legacy Plan™: An ESOP Alternative
Using SBA financing, the Step-Up Legacy Plan™ helps employees acquire the business they work for with as little as 5% down. Unlike ESOPs, it doesn’t require high EBITDA or complex retirement plan structures. Sellers receive most or all of their payout at closing, and employees become owners without incurring overwhelming debt.
Installment Sale Risks
Installment sales can be risky for sellers. If the business struggles or natural disasters strike, the seller bears the loss. We refer to this as the ‘Parent Loan because the seller takes all the risk, like a parent does for their child. SBA financing eliminates this risk by ensuring payment in full at closing.
Final Thoughts
SBA financing is one of the most underutilized tools for business acquisition. With as little as 5% down, qualified buyers can become owners, and sellers can exit securely and confidently. Whether you plan to buy a business or sell to a key employee, we’re here to help.
Contact Allen Business Advisors for a confidential consultation and learn how SBA financing can unlock your business transition.