Buy a Business with as Little as 5% Down | SBA 7(a) Loans Explained
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 business with as little as 5% down. This guide is for:
•Key employees who want to buy out the boss
•Companies looking to expand in the same industry
•Individuals looking to buy a business
The focus of this article is on employees who want to purchase the company they work for. It explains how SBA financing works, what lenders evaluate, and how to prepare for a successful purchase. The following guidance reflects the SBA program as of June 1, 2025, including updated rules for low down payments, employee buyouts, and business acquisition financing.
The SBA has its own loan policy, which is referred to in government speak as an SOP (Standard Operating Procedure). Each Bank has its own loan policy. The Bank's loan policy cannot be more liberal than the SBA's loan policy; however, it can be more conservative than the SBA's policy. Most banks' loan policies are far more conservative than the SBA's loan policy. A Loan Officer at a very large bank explained it this way: "We are considered too large to fail, so we cannot take the risk." Large banks typically don't want to make small loans to purchase businesses because it takes just as many resources to make a decision on a small loan as on a large loan.
Key Insight: The SBA guarantee is for the bank, not for you, the borrower. The SBA will reimburse between 70 and 90 percent of a bank's loss, yet many banks still won't provide SBA loans to higher-risk borrowers due to portfolio management concerns.
Smaller banks advertise that they provide business lending but tend to focus on commercial real estate rather than business acquisitions. From the bank's perspective, real estate provides recoverable collateral if a loan goes bad, whereas business acquisitions typically have no tangible collateral.
Important: There are only a select few banks whose loan policy mirrors the SBA loan policy. These are the banks we work with. They know who we are and like working with our clients.
An added buyer benefit is that the SBA lender will hire an independent, outside third party to value the business. This third-party entity has undergone bank scrutiny to be added to the bank's approved vendor list. This is similar to how a bank hires an appraiser before granting a mortgage on a home. 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.
The SBA loan policy does not specify the down payment required to buy out a partner. Our banks will focus on the length of time the person has been a partner (minimum two years documented on the K-1). They will also consider the person's role within the company. An active manager brings credibility; an absentee owner does not.
The SBA views these as lower-risk loans because there is a proven management team with a track record of successfully operating a business and managing cash flow. The acquiring company's established banking relationships, accounting systems, and processes support the acquisition and reduce integration risk. Business expansion loans consistently show default rates 40-60% lower than loans to first-time business buyers.
Business income repays the loan. You provide a personal guarantee and must operate profitably.
Three years of tax returns required. Banks focus on proven cash flow, not projections.
Significant financial changes require explanation and supporting documentation for approval.
Critical Point: The business is the borrower. Income generated from the business is used to repay the bank. As the owner, it is your responsibility to operate the business profitably. As such, you, the buyer/owner, will provide the bank with a personal guarantee.
The bank will study and analyze the business's HISTORICAL cash flow. Banks do not rely on projections. The bank will use three years of the business's tax returns and other information to make a decision. From the bank's perspective, the tax returns are signed under penalty of perjury. At the same time, business owners often present their businesses in the worst possible light to minimize their tax liability. The banks look at three years of tax returns. If there is a significant change from one year to the next, the bank will request an explanation and documentation to justify the substantial increase in profit.
Real World Example: Engineering & Land Surveying Business
Issue One: An increase in sales and net income just before the company is being sold.
Issue Two: Helping the junior partner who owns 5% of the business purchase the remaining 95% from the senior partner.
Background: In September 2024, the business acquired seven employees from a company that had closed. As a result of this happening late in the year, net income decreased. The company incurred higher payroll and employee benefits, as well as expenses for computers, trucks, and land surveying equipment. Although the employees worked in September, there was only a minor revenue increase on the tax return due to billing and collection timing.
Solution: The company provided monthly financial statements for 2023, 2024, and the year-to-date period through June 2025, which clearly showed an increase in sales, expenses, and net income. As a result, the bank agreed to consider this when determining the business's value.
Outcome: As a result of the junior partner having ownership and being actively involved in the business, our banking partner was willing to provide financing with no additional money down. This is a typical example of our Step-Up Legacy Plan in action.
We help you prepare your business for sale or acquisition, ensuring maximum value and smooth transactions.
If your projections are more than 10% over historical performance, you, as a buyer, lose credibility unless there is something unusual to justify the increase. The most common example is when a business buys a business that provides different services, and projections are higher due to cross-sale opportunities.
If the buyer is another business, the acquiring business will also need to provide the above information for their company.
The SBA requires a minimum down payment of 10% of the project cost. The project represents the total amount of money required to acquire the business, encompassing the purchase price of the business, working capital, and closing costs. This down payment can come entirely from the buyer or be split between the buyer and the seller.
• 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%)
Working capital is the amount of money required to operate a business. It ensures the new owner has enough capital for immediate operational needs.
If a buyer already owns a business and is acquiring another company within the same industry focus based on the NAICS (North American Industry Classification System) code, the SBA considers it an expansion. No down payment may be required in these cases.
This provision recognizes that established business owners bring significantly less risk to the transaction. You already understand the industry dynamics, have proven your ability to manage operations, and possess the infrastructure to integrate the acquired business. Your track record of profitability and operational excellence effectively serves as your "down payment" in the eyes of the lender.
To improve your chances of success, prepare your loan application carefully:
Credit Report: Review your credit report for errors and understand how your score reflects repayment history
Financial Statements: Include profit and loss statements, balance sheets, and business tax returns
Debt Service Coverage: Ensure the business generates enough profit to cover loan payments
Documentation: Gather articles of incorporation, leases, business licenses, insurance policies, and other essential documents
Use of Proceeds Statement: Provide a detailed breakdown of how the loan funds will be spent (e.g., acquisition, working capital, equipment)
During the bank's underwriting process, the bank will factor in your salary as a business expense. You will be required to provide a month-by-month projection of the business's anticipated performance, including your salary.
Critical Recommendation: It's highly recommended that you stick close to that projected salary amount during the initial 24 months following the closing. Once you have surpassed the initial 24 months, your chances of success increase dramatically. At that point, you will have a better understanding of the business and its cash flow, allowing you to determine if the business can afford a higher expense.
Prime Rate + Risk Premium = Interest Rate
If Prime is 7.5%, your rate would be 10.25%. This rate adjusts quarterly based on changes to the Prime Rate.Some banks may offer a lower interest rate. Those banks typically require a down payment of 20% or more, don't provide working capital, and place a mortgage on your residence.SBA loans offer predictable, fully amortizing loans without a balloon payment.
Using Home Equity for the SBA Down Payment
Bonus Tip: Apply for the home equity loan preferably six months in advance of the SBA loan request. Place the money you will need to buy the business in a savings account. This will save you time and simplify the process.
SBA rules require the bank to place a lien on your home if there is 25% or more in equity. If you have less than 25% equity, the bank is not required to place a lien on your home.
Example: If your home is worth $600,000 and you have a first mortgage for $150,000, the bank will put a lien on your home (more than 25% equity). However, if you have a home equity loan for $330,000, then there is only 20% equity, so the bank will not put a lien on your home. The fact that the money is not pulled from the home is irrelevant. Please note that the mortgage is at the bank's discretion. Our banking partners do not place liens on borrowers' homes unless the SBA requires it.
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
Installment sales can be risky for sellers. If the business struggles or natural disasters strike, the seller bears the loss. SBA financing eliminates this risk by ensuring payment in full at closing.
Real World Example
The owner wanted to sell his business to his key employee, and the employee wanted to buy the business. The buyer approached three local banks. Two banks immediately passed. The third bank expressed interest. The buyer waited and waited and waited, then the bank passed. Allen Business Advisors successfully arranged SBA bank financing for the buyer, requiring only 10% down payment. (One of the seller's requirements was that he be paid in full at the closing.) A mortgage was not placed on the personal residence because the buyer got a home equity loan before applying to the bank for the SBA loan.
SBA 7(a) financing is a loan guaranteed by the U.S. Small Business Administration to help individuals purchase small businesses with flexible terms and low down payments.
Yes, your employees only need 5% down. That is only $50,000 for every million dollars in value.
The business must be U.S.-based, for-profit, and generate enough cash flow to cover debt payments.
Lenders generally prefer a personal credit score of 680 or higher, with no recent bankruptcies or government loan defaults.
Yes. A home equity loan or line of credit (HELOC) is a common method to fund the required down payment.
The process can take 45 to 90 days depending on how quickly you provide documentation and how experienced your advisor is.
Yes. Anyone who has ownership in the business must personally guarantee the loan.
The business is the collateral. SBA rules read that a collateral shortfall is not a reason to decline a loan.
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.
