Yes: Use a 7(a) Term Loan
A business purchase is what the SBA calls a change of ownership. The 7(a) term loan is the SBA loan built for it. No SBA line of credit can fund one, and a 504 loan can fund only the building and major equipment.
A Standard 7(a) loan goes up to $5,000,000 and can cover the price, including goodwill and customer lists, plus closing costs and working capital. Smaller 7(a) Small loans (up to $350,000) and SBA Express loans (up to $500,000) can fund a purchase too, under the same purchase rules.[1]
Two SBA products are off the table for the business itself. SOP 50 10 8.1 says a change of ownership is not an eligible use for CAPLines, Export Working Capital loans or any revolving line, an SBA Express line included. A 504 loan pays only for long-term fixed assets, so it can't pay for goodwill or receivables. If the building comes with the business, it can go in its own 504 loan beside the 7(a), or into one blended 7(a) loan.
The loan pays off over no more than 10 years, with no balloon, except for some special purpose properties where real estate is 85% or more of the project. In a blended loan, only the real estate share can run longer, up to 25 years. The 504 program can't be used in a blended loan.
Which Kind of Purchase Is Yours
If you have never owned part of the business, or have worked there less than 24 months, your purchase is an Initial Acquisition, the strictest type. It is also the default.
The SBA sorts every purchase into a type, and the type sets your numbers.
- Initial Acquisition: you become the new majority or largest owner and were never an owner, or you have worked at the business for less than 24 months. This page calls you an outside buyer.
- Owner Buyout: existing owners, or employees with 24 months or more at the business, purchase the company itself, meaning its stock or ownership interest. The 10% is figured on the purchase price, and your lender may reduce it. An asset purchase through a new company is an Initial Acquisition, even for a longtime employee.
- Business Expansion: a business that has operated for two full fiscal years purchases 100% of another business in the same four-digit industry group. Its cash flow floor is 1.15.
The rest of this page uses the Initial Acquisition numbers, because that type covers every first-time buyer.
The Down Payment: 10% of the Total Project Cost
SOP 50 10 8.1: "Initial Acquisition: 10%." And: "For Initial Acquisitions, the required equity injection cannot be reduced or eliminated."
The 10% is figured on the whole project, not just the price. That means the price plus closing costs, the valuation, legal fees and the working capital you borrow to run the business. On a $1,550,000 project, the minimum is $155,000.[2]
Money that counts without a limit:
- Cash you did not borrow, including a gift.
- A personal loan to a guarantor that is repaid from something other than the business's cash flow. Your salary from the business doesn't qualify.
- A grant with no repayment or clawback.
- Prepaid expenses your lender has verified. Fees for education, advisory services or an Agent don't count.
For the full rules, including how other deal types work, see SBA Loan Down Payment.
Seller Notes: Full Standby, and No More Than Half
A seller note counts toward your 10% only on full standby: no principal or interest payments for the whole term of the SBA loan. Standby notes and small outside investors together can cover no more than half of the 10%.
Sellers often agree to finance part of the price. The SBA treats that note as equity only when it is subordinated to the lender and on full standby, signed on SBA Form 155 or the lender's version. Interest can build up while it waits.[3]
The half cap covers three sources added together: standby debt, standby seller notes and an investor who owns less than 20%. On a $155,000 requirement, those three can supply at most $77,500. The rest comes from the sources above.
A seller note that is paid monthly is allowed, but it is not equity. It counts as debt in the coverage test, figured over no more than 10 years, and it counts toward the cap on total debt below.
Free: The 27-Point SBA Loan Checklist
See what lenders check before they approve a purchase, including how they verify where your 10% came from.
✓ You're in!
Your 27-point SBA loan checklist is downloading now, check your downloads folder. We've also added you to the list for SBA updates from Hartwell Labs.
Enter your email and we'll send you the free 27-point checklist instantly.
Enter your email and we'll send you the free 27-point checklist instantly.
No spam. Unsubscribe anytime. We'll also notify you of new book editions.
The Cash Flow Test: 1.25 on the Seller's Results
The business must show $1.25 of cash flow for every $1.00 of loan payments, measured on the last fiscal year or the average of the last two. Your projections can't carry it.
The test uses what the business has already earned, from the seller's tax returns. The lender may adjust for documented items, such as a one-time cost or the seller's personal expenses run through the company, and it can subtract a market salary for the new owner who will run it. Adjustments no one can document are thrown out.[4]
Your plans for growth matter to the lender, but they can't count toward the 1.25. SOP 50 10 8.1 says the lender must evaluate your projections and "may not rely on them" to meet the floor. If the history comes up short, the fix the SOP names is more equity and a smaller loan.
There is a second test on your household. Your salary from the business plus other income has to cover your personal bills and debts, at 1 to 1. See Global DSCR Explained.
The Price Can't Be More Than the Valuation
If you pay more than the lender's valuation, "the difference must be made up by equity." And total debt, including a seller note that is being paid, is capped at the valuation.
Your lender orders an independent business valuation, prepared for the lender, not for you or the seller. On a price of $350,000 or less the lender may do its own, unless the buyer and seller have a close relationship.[5]
The valuation sets two limits. Any part of the price above it comes from your money, on top of what you planned. And the SBA loan plus any seller debt not on full standby can't add up to more than the valuation. A lower valuation is often the best reason to ask the seller for a lower price.
Quality of Earnings at $3 Million
When the business purchase price is $3 million or more, the lender must also get an independent Quality of Earnings report, and it sizes the loan to that report's earnings.
A Quality of Earnings is an accountant's re-check of the seller's earnings against bank statements and tax returns. It applies to Initial Acquisitions and Business Expansions. The $3 million is measured before your equity and any seller debt, and it leaves out owner-occupied real estate. The report can't be prepared by or for the seller. Its cost is yours, and it can count toward your equity.[6]
Below $3 million, you can still run the same checks yourself. See Verify the Seller's Financials.
Your Personal Guaranty and Collateral
Every owner of 20% or more gives an unlimited personal guaranty. If the business's assets don't fully secure the loan, equity in a home you solely own can come into the deal.
The guaranty rule is the same for every SBA loan.[7] On a purchase, the lender takes liens on the business's equipment, vehicles, real estate, receivables and inventory, each counted at a discount. Goodwill and customer lists count for nothing as collateral, so a purchase that is mostly goodwill will come up short.
When there is a shortfall, the lender must take available equity in personal real estate solely owned by 20%+ owners and guarantors. It doesn't have to when the equity is less than 25% of the property's market value. A shortfall alone is never a reason to decline the loan. See SBA Collateral Requirements.
The Seller Leaves, and No Earnouts
On an Initial Acquisition, the seller can't stay as an officer, director, owner or employee. A paid consulting role is allowed for no more than 24 months in total. Earnouts, where part of the price depends on future results, are banned. A buyer rebate, a price cut the seller refunds if something goes wrong, is allowed and goes toward the loan principal.[8] Every owner must also be a U.S. citizen or U.S. national living in the United States.
A Worked Example: Odette's IT Services Company
Odette's project is $1,550,000. Her 10% is $155,000: $80,000 of her savings and a $75,000 seller note on full standby. Her loan is $1,395,000, under the $1,400,000 valuation, and the seller's last year covers it 1.32 times.
Odette has run operations for someone else for twelve years and has never owned a business. Her purchase is one of the three deals in FUNDED: How to Purchase a Business with an SBA Loan. The seller of a 14-employee IT services company asked $1,450,000. Her lender's independent valuation came in at $1,400,000, and she negotiated the price down to match it.
Her total project is the $1,400,000 price, $50,000 of valuation, legal and closing costs, and $100,000 of working capital. The seller's $75,000 note fits under the half cap of $77,500, and it stays on standby for all 10 years.
The broker's sheet showed $475,000 of cash flow. The lender removed a one-time project, rejected $30,000 of perks no one could document, and paid Odette a $125,000 market salary. That left $285,000. Her payments are $216,612 a year at an illustrative 9.50% over 10 years, so coverage is 1.32, with $14,236 of room over the floor.
If her lender uses the two-year average instead, coverage drops to 1.22, and she has to add about $30,000 more cash to shrink the loan. Which basis a lender uses is its call, so ask before you sign the letter of intent. The price is under $3 million, so there is no Quality of Earnings. Her FY2027 upfront guaranty fee is $36,734.38.
Your Choices Before You Sign
The SBA rules are fixed, but the terms of your deal are not. These trade-offs shape a purchase:
- Price against valuation. Paying above the valuation costs you dollar for dollar in extra cash. Negotiating to the valuation, as Odette did, keeps the 10% at 10%.
- A standby note or a paid note. A standby note can cover up to half your equity, but the seller waits years for payment. A paid note keeps the seller happier, adds to your yearly payments, and counts against the valuation cap.
- More cash or a smaller loan. If the seller's history is thin against 1.25, more equity is the fix the SOP names. Know how much you can add before you make an offer.
Two questions to ask your lender first: will it test coverage on the last year or the two-year average, and how will it value the assets as collateral? For terms to put in your offer, see The SBA-Proof LOI.
Related SBA Lending Guides
- Which SBA Loan Fits Your Situation?, the free 6-question loan chooser
- SBA Loan Down Payment, how much you put down by deal type
- SBA Loan Requirements, credit, equity, cash flow and experience
- What Changed in SOP 50 10 8.1, the October 2026 rules for business buyers
- Red Flags That Kill Acquisitions, each mapped to the rule it trips
- SBA Startup Loans, if starting from scratch is your other option
- SBA Max Purchase Price Calculator, the highest price the cash flow supports
Sources
- SBA SOP 50 10 8.1, Lender and Development Company Loan Programs (effective October 1, 2026), including Appendix 15, 7(a) Changes of Ownership
- 13 CFR 120.160, Loan conditions (personal guarantees)
- SBA Information Notice 5000-881797, 7(a) Fees for Fiscal Year 2027 (effective October 1, 2026)
