SBA 7(a) Loans for Business Acquisition: What You Need to Know

Buying an existing business can be a smart way to become an entrepreneur, but most buyers don’t have enough cash to purchase a business outright. Instead, a government-backed loan — like an SBA 7(a) loan through the Small Business Administration (SBA) — can be a flexible and powerful financing tool for a variety of soon-to-be business owners.

Here’s a look at how SBA business acquisition loans work, who can qualify, and what to expect from the available loan repayment terms, as well as how to improve your chances of approval when trying to get an SBA loan to acquire a business.

What Is an SBA 7(a) Loan?

An SBA 7(a) loan is a small business loan offered through traditional lenders like banks and credit unions, but with the backing of the U.S. Small Business Administration. These 7(a) loans are the SBA’s most common loan program, providing a maximum loan amount of up to $5 million that can be used for working capital, equipment purchases, commercial real estate, or business acquisitions.

SBA 7(a) loans are designed to help small businesses get funding through SBA-approved lenders, with the SBA guaranteeing a portion of the loan to reduce the lender's risk. While this means meeting more stringent SBA eligibility criteria, it can also mean lower interest rates and more flexible loan repayment terms.

For many entrepreneurs, the SBA 7(a) loan for business acquisition is a crucial tool that makes buying an existing company possible.

Can You Use an SBA 7(a) Loan to Acquire a Business?

Yes, you can use an SBA loan to acquire a business. In fact, that’s the SBA 7(a) loan’s primary use case.

Many different types of businesses are eligible for an SBA business acquisition loan, including franchises and independent businesses, for both complete and partial ownership changes (such as a partner buyout). Of course, you’ll need to meet the SBA guidelines for business acquisitions if you plan to use an SBA loan to acquire a business.

There are two main SBA business acquisition loan structures. There’s a(n):

• Asset purchase, where you buy the business's assets but not its legal entity.
• Stock purchase, where you buy the company as-is, including any liabilities and contracts.

SBA lenders usually prefer asset purchases due to reduced legal complications.

SBA 7(A) Business Acquisition Loan Requirements

To qualify for an SBA business acquisition loan, you, the business in question, and even the seller must meet certain eligibility requirements.

Buyer criteria

Before you can use an SBA 7(a) loan as a business acquisition financing option, you must check some boxes. You should:

• Be a U.S. citizen or lawful permanent resident.
• Have a strong personal credit history (including a FICO score of around 680 or higher).
• Have relevant industry experience or a qualified partner.
• Demonstrate an ability to repay the loan with either cash flow, fixed assets, or cash reserves.

The SBA 7(a) loan application process generally requires a strong business plan, as well. Expect to provide financial statements — such as a balance sheet, profit & loss statement (P&L), bank statements, and tax returns — as part of the process.

Business criteria

The business you’re trying to acquire should be a for-profit company operating in the U.S. and have a proven track record of profitability. You may be asked to provide evidence of accounts receivable, statements from business banking accounts, and more in order for the business to qualify.

To take out an SBA business acquisition loan, the business must not be a passive investment or speculative venture. The business’s current valuation will also need to be supported by financials or, if necessary, a neutral third-party appraisal.

Down payment requirements

SBA-approved lenders include banks, credit unions, and other member FDIC financial institutions. These lenders are able to set their own terms within the SBA’s guidelines, including the down payment required by business acquisition borrowers.

For an SBA 7(a) loan, this down payment is usually between 0% to 20% of the total loan amount, depending on the borrower’s credit approval rating, loan amount, and other factors. SBA loan down payments can come from personal savings or investments, including retirement accounts. The funds can also be gifted funds from friends or family, include leveraged business assets, or even be offset by seller financing agreements.

Seller participation

Another common SBA acquisition loan requirement is that the seller finance a portion of the deal, or at least remain involved in the business for a set transition period after the sale is complete. The exact terms of your seller’s participating during and after the sale will largely depend on the SBA 7(a) lender you choose.

SBA 7(a) Business Acquisition Loan Terms and Conditions

As mentioned, an SBA 7(a) loan provides up to $5 million in business funding, with repayment terms of up to 10 years for business acquisitions.

Since the SBA guarantees these loans, they often have lower interest rates than you’d find with other business loans. SBA loan rates are set according to the Prime Rate plus a set margin.

SBA business acquisition loans do involve closing costs as well as a borrower guarantee fee. You can calculate your own loan guarantee fee online through SBA.gov, which will vary depending on when you take out your loan, how much you borrow, and the repayment term you choose.

Collateral may be required as part of the SBA loan process, though these loans are never fully secured. This makes them different from collateral-based loans such as equipment financing.

Lastly, SBA business acquisition loans require a personal guarantee from all owners with 20% or greater stake in the company. This guarantee means that if the business defaults on the loan (fails to make monthly payments as promised), the owner(s) may be held personally liable for the remaining debt.

How the SBA Loan Process Works for Acquiring a Business

If you’re planning on using an SBA loan to acquire a business, there are a few things you can do to prepare for the loan process and better your chances of approval.

1. Get prequalified. Gather your necessary financial documents and get a business plan ready. Whether you’re a new business or acquiring an existing business, SBA lenders expect to see how you’ll use the money you borrow and what your plans are to develop the company.
2. Pick a business to acquire. You may or may not have a specific business in mind already, but this is something you’ll need to choose before applying for an SBA business acquisition loan. Pick a business that you’re not only interested in but that has a healthy revenue and client base, a willing seller, and has potential for future growth.
3. Do your due diligence. You’ll want to review the business’s past and present financials, including tax returns, contracts, and more. This will give you a good idea of the company’s activity and profitability, telling you not only what the business is worth now but what it might be worth in the future.
4. Submit your loan application. Once you have all of your ducks in a row, you can submit your application for an SBA business acquisition loan. Use the SBA website’s Lender Match tool to find an approved lender that meets your needs, then compare your options to find the best one with the lowest fixed rates, best repayment terms, and most reasonable fees. You’ll usually need to provide relevant financial documentation and your business plan at this time.
5. Wait for loan underwriting and approval. Once all necessary documents are received, the lender will review everything and determine whether you qualify. The lender will also use this information to decide which SBA acquisition loan terms to offer you.
6. Go to closing and transfer ownership of the company. You’ve been approved, you’ve signed your loan documents, and you’re ready to close on your SBA business acquisition loan. You’ll be asked to sign a promissory note for the funds (essentially promising to repay the debt according to specific terms) and then can begin the process of transferring ownership for your acquired business.

Pros and Cons of Using an SBA Loan to Acquire a Business

The application process for an SBA business acquisition loan can be quite arduous and there are many different fees involved. However, since these loans are backed with an SBA guarantee, SBA 7(a) rates through an SBA-preferred lender may be lower than with other types of business loans.

Pros

The benefits of using an SBA 7(a) loan to acquire a business include:

• A lower down payment compared to conventional loans
• Favorable interest rates and repayment terms
• Access to larger loan amounts (up to $5 million!)
• Flexible use of funds for things like inventory, working capital, and real estate purchases

Cons

Of course, an SBA business acquisition loan isn’t right for everyone. The downsides include a:

• Very long approval process
• Heavy documentation requirement
• The need for a personal guarantee (from owners with 20% stake or more in the company) and possible collateral to secure the loan

Alternatives to SBA 7(a) Business Acquisition Loans

If you don’t think you can qualify for an SBA 7(a) loan, need funds faster, or want to explore faster lending options, here are some alternatives.

• Conventional bank loans and online lenders may offer approval and funding quickly, though you won’t be able to borrow as much from these lenders as you could from the SBA.
• Seller financing skips the bank lender step altogether, but it’s important to have a secure and legal agreement in place for this option.
• Private investors or venture capital can give you access to flexible funds quickly, though you’re doing so in exchange for a portion of your company and/or its future earnings.
• A Rollover for Business Startups (ROBS) is an arrangement where you use 401(k) retirement funds to fund new business ventures. There are strict IRS rules in place regarding this type of funding and what qualifies, so be sure to read through the laws before you borrow against your own retirement savings.
• SBA 504 loans can be used for improving your business, buying fixed assets, refinancing debt, buying new facilities, and more. Like the SBA 7(a) loan, 504 loans offer up to $5 million in small business funding.
• SBA express loans are faster-processed business loans in smaller amounts, designed to give you access to up to $500,000 in funding for your existing business or a business acquisition. These loans don’t offer as much government backing so while you can get approved and funded faster, lenders may charge higher rates or fees at their own discretion.

Final Thoughts

SBA 7(a) loans are a valuable tool when it comes to acquiring a business, offering borrowers up to $5 million in funding. But while SBA business acquisition loans can sometimes be a better choice than other small business loan options, they also require a lot of planning, preparation, and even patience while finding and working with the right lender. The SBA loan approval process can be lengthy and involve a lot of documentation, so you may want to consult with an SBA loan advisor or local professional to learn more.

FAQs

What credit score do I need to qualify for an SBA 7(a) loan for business acquisition?

Most SBA lenders want to see a personal FICO credit score of at least 680 before approving you for an SBA 7(a) loan. A higher score may improve your approval odds and loan terms, while a lower score may require collateral, a larger down payment, or other guarantee.

How much down payment is required for an SBA loan to acquire a business?

Down payments for SBA business acquisition loans may range from 0% to 20%, though they typically fall between 10% and 20%. Additionally, some lenders will allow for partial down payment offsets through seller financing or gift funds from friends or family.

Can I use an SBA 7(a) loan to buy a franchise?

Yes, SBA 7(a) loans can be used to buy both independent businesses and eligible franchises listed on the SBA Franchise Directory.

Does the SBA require collateral for a business acquisition loan?

Partial collateral may be required on an SBA 7(a) loan, but these loans generally aren’t ever fully secured. Personal guarantees are required from any owners with 20% or more equity in the company, as well.

How long does it take to get approved for an SBA business acquisition loan?

The process of applying, getting approved, and being funded for an SBA business acquisition loan typically takes between 45 to 90 days. The length of this process often depends on the complexity of the transaction, how ready the borrower’s documentation was at the start of the process, how much is being borrowed, and even the business being acquired.

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