SBA Loans for Buying a Business: What Sellers Need to Know

If you're selling a business under $5 million, there's a good chance your buyer will use an SBA loan. Understanding how these loans work can help you prepare your business for sale and avoid deal-killing surprises.

What is an SBA Loan?

The Small Business Administration (SBA) guarantees loans made by approved lenders for business acquisitions. The most common program is the SBA 7(a) loan.

Key features:

• Up to $5 million in loan amount
• 10-year terms typical for business acquisitions
• 10-20% down payment required from buyer
• Lower interest rates than conventional financing
• Personal guarantee required from buyer

For buyers, SBA loans make acquisitions accessible. They can buy a $2 million business with $200-400K down instead of paying all cash.

Why This Matters to Sellers

About 60-70% of small business acquisitions involve SBA financing. If your business qualifies for SBA loans, you have access to a much larger buyer pool.

Businesses that don't qualify — or that have issues SBA lenders won't accept — sell slower and often for less.

What Makes a Business "SBA-Friendly"?

SBA lenders look for:

Clean financials: At least 2-3 years of tax returns showing consistent profitability. The business needs to demonstrate it can service the debt.

Reasonable seller compensation: If you're taking a $500K salary from a business that only makes $600K, lenders will question whether there's enough cash flow for loan payments.

Asset coverage: Lenders want collateral. Businesses with equipment, inventory, or real estate are easier to finance than pure service businesses.

Stable revenue: Significant revenue declines or customer concentration issues make lenders nervous.

Transferable value: The business needs to be able to operate without you. Heavy owner dependence is a red flag.

What SBA Lenders Won't Finance

Some business types are excluded from SBA loans:

• Businesses with significant gambling revenue
• Speculative real estate
• Businesses primarily engaged in lending
• Multi-level marketing businesses
• Certain adult entertainment businesses

Additionally, lenders avoid businesses with:

• Negative cash flow
• Serious legal or compliance issues
• Too much customer concentration
• Unverifiable financials
• Owners unwilling to provide reasonable transition support

The SBA Appraisal Process

For acquisitions over $250K, the lender will require a business appraisal. This is an independent valuation that determines the maximum loan amount.

If your asking price is significantly higher than the appraised value, buyers won't be able to get financing. This is why realistic pricing matters — not just for attracting buyers, but for actually closing deals.

Seller Notes and SBA Loans

Many SBA deals include a seller note — you finance part of the purchase price, typically 10-20%.

Why would you do this?

• It can bridge the gap between SBA financing and your asking price
• It demonstrates confidence in the business
• It makes the deal easier to close
• You earn interest on the note

Seller notes in SBA deals must be on "standby" — meaning the buyer pays the SBA loan first, and your payments come after. This protects the lender.

How to Make Your Business More Financeable

If you're thinking about selling in the next few years:

Clean up your books: Work with a CPA to ensure your financials are clear and verifiable.

Normalize your expenses: Remove personal expenses from the business. Document any add-backs clearly.

Document everything: SOPs, customer lists, vendor contracts. Make it easy for a lender to understand the business.

Maintain stability: Avoid major changes in the year before selling. Lenders like consistency.

Consider your lease: SBA lenders typically want to see a lease term that extends beyond the loan term, or reasonable renewal options.

Timeline Expectations

SBA loans typically take 45-90 days to close after the buyer submits a complete application. Factor this into your expectations — SBA deals take longer than cash deals.

The process:

1. Buyer submits application and business plan
2. Lender reviews and requests additional documents
3. Business appraisal (2-3 weeks)
4. Underwriting review
5. Loan commitment
6. Closing

The Bottom Line

SBA buyers are often great buyers — they're serious, they've got skin in the game (that down payment), and they're motivated to make the business work because they're personally guaranteeing the loan.

Making your business SBA-friendly expands your buyer pool and often leads to faster, smoother transactions.

If you're not sure whether your business would qualify for SBA financing, let's talk. I can help you assess your situation and identify any issues to address before going to market.