How an SBA loan works when you buy a business
Many people who buy a small business pay for it with an The Small Business Administration's main loan program. A bank makes the loan and the SBA guarantees part of it. Business purchase loans can go up to $5,000,000.. This guide explains what the loan pays for, how much cash you need, what the payments look like, and each step between finding a business and closing day.
Summary
- You put in at least 10% of everything the deal costs. That total includes fees and starting cash for the business, so it is more than 10% of the price.
- A bank lends the rest. The SBA guarantees most of the loan, which lets the bank lend against a business whose value is mostly its customers and reputation.
- You repay the business part over 10 years or less, in equal monthly payments, with no lump sum due at the end.
- The business's recent earnings must cover the yearly loan payments with room to spare: $1.25 of earnings for every $1 of payments, after paying whoever runs it.
- Once they have everything they need, most lenders close an SBA purchase in 45 to 90 days.
What is an SBA 7(a) loan?
An SBA 7(a) loan is a loan from a bank or other approved lender that the U.S. Small Business Administration partly The SBA's promise to repay the lender a set share of the loan if the business can't pay. It protects the lender, not you. You still owe the full amount..
The SBA does not lend you the money itself. The lender makes the loan, and the SBA promises to repay the lender a set share of it if the business cannot.
- On a loan over $150,000: the SBA guarantees 75%.
- On a loan of $150,000 or less: the SBA guarantees 85%.
Most of the price of a small business usually pays for The part of a business's price that pays for things you can't touch, such as its customers, reputation, name and trained staff. In most small business sales it is most of the price., such as its customers, name and staff. A bank cannot resell goodwill the way it can resell a building or a truck, so the guarantee is what makes many banks willing to lend on a business purchase.
In return for the guarantee, the lender follows the SBA's rulebook, called the Standard Operating Procedure, the SBA's rulebook for lenders. The current version is SOP 50 10 8.1, which applies to loans from October 1, 2026.. Every rule on this page comes from the current version, SOP 50 10 8.1.
Who can use an SBA loan to buy a business?
- Owners: every owner of the business, and anyone who has to guarantee the loan, must be a U.S. citizen or U.S. national whose main home is in the United States.
- The business: it has to be a for-profit business that counts as small by SBA standards and works in an eligible industry. Most Main Street businesses qualify, while a few types, such as lending companies and passive real estate investing, do not.
- The seller: the seller cannot stay on as an owner or employee. You can hire the seller as a consultant to help with the handover for up to 24 months in total.
- First-time owners: if you do not already own part of the business, the SBA treats the purchase as an The SBA's name for a purchase by someone who doesn't already own part of the business, or who has worked there for less than 24 months. First-time owners fall here, and the 10% minimum can't be lowered.. That is the case this guide describes.
What can the loan pay for?
The loan covers more than the price. A lender adds up everything you need to own and run the business on your first day. The SBA calls that total the Everything it takes to own and run the business on day one: the price, lender costs, the guaranty fee, your own advisors and the cash the business needs to start. Your 10% is figured on this total, not on the price..
- The price you and the seller agree on.
- Fees the lender charges you to make the loan, such as a packaging fee, title and filing fees and the lender's lawyer. The lender's fee sheet will list the real amounts., such as the lender's packaging fee and the lender's lawyer.
- The A one-time fee the SBA charges the lender for the guarantee. The lender passes it to you, and you can pay it out of the loan. On loans from $150,001 to $700,000 it is 3% of the part the SBA guarantees., which you can usually pay out of the loan.
- Your attorney, who reviews the purchase agreement and handles closing for you; an accountant's quality of earnings review, which checks that the seller's earnings are real; and the business valuation, which the lender orders and you pay for., which check the purchase for you and for the lender.
- Cash the business keeps on hand to pay staff, rent and suppliers before customers pay their bills. The lender checks that the business will have enough for its next 12 months. to make payroll and buy supplies before customers pay.
The largest standard 7(a) loan is $5,000,000. If the deal includes the building, the real estate part can be repaid over as long as 25 years. The business part stays at 10 years or less.
How much cash do you need?
The SBA requires you to put in at least 10% of the total project cost. Most people call it the The money you put into the deal yourself. For a first-time owner it must be at least 10% of the total project cost..
For someone buying a business they do not already own, the lender is not allowed to lower that 10%. Lenders can ask for more, and the last section of this guide explains when they often do.
The two examples below show every line. Both use our standard estimates for costs that vary from deal to deal, and each estimate's rule sits under its line. They are the same estimates Financial Fit uses.
Examples: what you need at two asking prices
A $500,000 business
Your household spends $7,000 a month.
Cash you need on closing day
$98,662
$56,662 into the deal, plus a $42,000 household reserve you keep.
| Price | $500,000 |
|---|---|
| Fees the lender charges you to make the loan, such as a packaging fee, title and filing fees and the lender's lawyer. The lender's fee sheet will list the real amounts.Our estimate: 1.5% of the loan, at least $6,000 | $7,649 |
| Your attorney, who reviews the purchase agreement and handles closing for you; an accountant's quality of earnings review, which checks that the seller's earnings are real; and the business valuation, which the lender orders and you pay for.Our estimates, the same as Financial Fit | $17,500 |
| Cash the business keeps on hand to pay staff, rent and suppliers before customers pay their bills. The lender checks that the business will have enough for its next 12 months.Our estimate: 6% of the price, at least $10,000 | $30,000 |
| A one-time fee the SBA charges the lender for the guarantee. The lender passes it to you, and you can pay it out of the loan. On loans from $150,001 to $700,000 it is 3% of the part the SBA guarantees.3% of the 75% of the loan the SBA guarantees | $11,474 |
| Everything it takes to own and run the business on day one: the price, lender costs, the guaranty fee, your own advisors and the cash the business needs to start. Your 10% is figured on this total, not on the price. | $566,623 |
| SBA loanThe total project cost minus your 10% | $509,961 |
|---|---|
| The money you put into the deal yourself. For a first-time owner it must be at least 10% of the total project cost.10% of $566,623 | $56,662 |
| Your cash into the deal | $56,662 |
|---|---|
| Money you keep in your own bank account after closing to cover your household's spending while the business settles in. Six months is our planning rule, not an SBA rule, and you don't pay it to anyone.Six months of $7,000 household spending, kept in your bank | $42,000 |
| Total | $98,662 |
The guaranty fee and the lender costs depend on the size of the loan, and the loan depends on them. The calculation repeats until the numbers stop moving, which is why the loan comes out at $509,961 and not a round number.
A $300,000 business
Your household spends $6,000 a month.
Cash you need on closing day
$70,856
$34,856 into the deal, plus a $36,000 household reserve you keep.
| Price | $300,000 |
|---|---|
| Fees the lender charges you to make the loan, such as a packaging fee, title and filing fees and the lender's lawyer. The lender's fee sheet will list the real amounts.Our estimate: 1.5% of the loan, at least $6,000 | $6,000 |
| Your attorney, who reviews the purchase agreement and handles closing for you; an accountant's quality of earnings review, which checks that the seller's earnings are real; and the business valuation, which the lender orders and you pay for.Our estimates, the same as Financial Fit | $17,500 |
| Cash the business keeps on hand to pay staff, rent and suppliers before customers pay their bills. The lender checks that the business will have enough for its next 12 months.Our estimate: 6% of the price, at least $10,000 | $18,000 |
| A one-time fee the SBA charges the lender for the guarantee. The lender passes it to you, and you can pay it out of the loan. On loans from $150,001 to $700,000 it is 3% of the part the SBA guarantees.3% of the 75% of the loan the SBA guarantees | $7,058 |
| Everything it takes to own and run the business on day one: the price, lender costs, the guaranty fee, your own advisors and the cash the business needs to start. Your 10% is figured on this total, not on the price. | $348,558 |
| SBA loanThe total project cost minus your 10% | $313,702 |
|---|---|
| The money you put into the deal yourself. For a first-time owner it must be at least 10% of the total project cost.10% of $348,558 | $34,856 |
| Your cash into the deal | $34,856 |
|---|---|
| Money you keep in your own bank account after closing to cover your household's spending while the business settles in. Six months is our planning rule, not an SBA rule, and you don't pay it to anyone.Six months of $6,000 household spending, kept in your bank | $36,000 |
| Total | $70,856 |
This loan is $350,000 or less, so it can be a A version of the 7(a) loan for amounts of $350,000 or less, with simpler paperwork. Since October 1, 2026 it can be used to buy a business. loan. The price is also $350,000 or less, so the lender may value the business itself instead of hiring an outside appraiser, unless you and the seller are closely related.
Where can the down payment come from?
The SBA sorts the money into two groups. Money in the first group can cover your whole 10%. Money in the second group can cover half of it at most, all sources combined.
Money that can cover all of your 10%
- Savings or other cash you did not borrow, including a gift from family.
- A personal loan, such as a home equity line, as long as you repay it from income outside the business. A salary the business pays you does not count as outside income.
- A grant you never have to repay.
- Costs you have already paid that the lender can verify, such as the business valuation. Money spent on education, advisors or agent fees does not count.
Money that can cover up to half of your 10%
- A An arrangement where the seller lets you pay part of the price later, with interest. In effect the seller lends you that part of the price. on A seller note or other loan that receives no payments at all, neither principal nor interest, until the SBA loan is fully repaid. Only debt on full standby can count toward your 10%..
- Any other loan on full standby.
- A Someone who puts money in for a share of under 20% and has no say in running the business. who owns less than 20% and has no control.
The lender also has to see the money. Most lenders want at least a month of statements from the account it comes from, plus proof that it moved into the deal. A A signed note from a family member saying money they gave you is a gift you don't have to repay. The lender also needs bank statements showing the money arriving in your account. on its own is not enough proof.
Example: four ways Maria could cover $56,662
Maria is buying the $500,000 business from the first example, so her 10% is $56,662.
- Savings and a home equity line: Maria has $28,000 saved and draws $28,662 on a home equity line that her spouse's paycheck repays. All $56,662 counts.
- The same line, repaid from the business: Maria plans to repay the line from the salary the business pays her. The $28,662 does not count, so she needs to find it elsewhere.
- A seller who waits: the seller carries $28,331 on full standby, which is exactly half. Maria brings the other $28,331.
- A seller and her brother: the seller carries $16,999 and her brother wants to invest $16,999 for a small stake. Together they can cover only half, which is $28,331, so only $11,332 of her brother's money counts. Maria still brings $28,331.
What will the monthly payment be?
SBA rates are set as the The interest rate large U.S. banks charge their most creditworthy customers, published by The Wall Street Journal. SBA rates are usually set as Prime plus a fixed extra amount, so they move when Prime moves. plus an extra amount called the The extra percentage a lender adds on top of Prime to set your rate. The SBA caps how big the spread can be, and the cap depends on the size of the loan.. The SBA caps the spread, and the cap is higher on smaller loans.
| Loan size | Most a lender can charge | At Prime of 7.00% |
|---|---|---|
| $50,000 or less | Prime plus 6.5 | 13.5% |
| $50,001 to $250,000 | Prime plus 6.0 | 13% |
| $250,001 to $350,000 | Prime plus 4.5 | 11.5% |
| Over $350,000 | Prime plus 3.0 | 10% |
These caps apply to a A rate that resets when Prime changes, so your monthly payment can go up or down over the life of the loan. Your loan documents say how often it resets., which moves when Prime moves. Fixed-rate SBA loans have their own separate caps.
Our examples use the cap so that the numbers never look better than the rules allow. Lenders can quote less than the cap, and quotes on larger loans in particular often come in lower.
You repay the business part over 10 years at most, in equal monthly payments, with no A large lump sum due at the end of a loan because the monthly payments didn't fully pay it off. SBA business purchase loans can't have one. at the end. On a 10-year loan, the SBA charges no fee for paying it off early.
Example: payments on the two loans
- The $500,000 business: a $509,961 loan at 10% over 10 years is $6,739 a month, which is $80,870 a year. Over the full 10 years you would pay $298,740 in interest.
- The $300,000 business: a $313,702 loan falls in the $250,001 to $350,000 band, so the cap is 11.5%. Over 10 years that is $4,411 a month, which is $52,926 a year.
Financial Fit starts from the cap too, and lets you type in a rate a lender has quoted you to see how your numbers change.
How does a lender decide the business can carry the loan?
The lender looks at the business's earnings for its last full year, or the average of its last two years. Those earnings have to cover all the yearly loan payments at least 1.25 times, which means $1.25 of earnings for every $1 of payments. Lenders call this The business's yearly earnings divided by its yearly loan payments. 1.25 means the business earned $1.25 for every $1 it owes in payments. For a first-time owner, the SBA requires at least 1.25, using past results..
- Someone has to be paid to run it: the lender measures earnings after paying whoever runs the business. If that is you, the salary has to be enough to cover your household's living costs.
- Past results count, plans do not: the lender will review your plans for growth, but it cannot use Your estimates of what the business will earn in the future. Lenders read them to understand your plans, but the SBA doesn't let them use projections to approve a business purchase loan. to pass the 1.25 test.
- Listings usually show a different number: most listings show Seller's discretionary earnings: the profit a listing shows plus the current owner's own salary and personal expenses run through the business. It shows what one full-time owner takes home before paying any loan. Listings usually call it cash flow., which include what the current owner pays themselves. Subtract a fair wage for whoever will run the business before comparing it with the loan payment.
Example: the earnings each business needs
- The $500,000 business: $80,870 in yearly payments times 1.25 is $101,088. The business needs to have earned at least that much after paying whoever runs it.
- The $300,000 business: $52,926 times 1.25 is $66,158. If this business earned $64,000 after paying its manager, it would fall about $2,200 short at the full rate cap. A lower quoted rate, a lower price or a larger down payment would each close that gap, because each one lowers the yearly payment.
Deal Fit runs this same check on any listing you add to your Your free space on this site for the listings you're looking at and their Deal Fit reports. It comes with a sample deal to try.. You can switch between running the business yourself and paying a manager, and see how the result changes.
How can a seller note lower your cash at closing?
A An arrangement where the seller lets you pay part of the price later, with interest. In effect the seller lends you that part of the price. means the seller lets you pay part of the price later, like a loan from the seller. With an SBA loan, a seller note counts toward your 10% only if it is on A seller note or other loan that receives no payments at all, neither principal nor interest, until the SBA loan is fully repaid. Only debt on full standby can count toward your 10%., so the seller receives no principal and no interest until the bank loan is fully repaid.
Example: the $500,000 business with a seller who waits
- Seller note: the seller carries $28,331, which is half of your $56,662 and the most a seller note can count for.
- Your cash into the deal: $28,331.
- Cash on closing day: $28,331 plus your $42,000 household reserve, which is $70,331. Without the seller note it was $98,662.
- Bank payment: still $6,739 a month, because the SBA loan is the same size and the seller receives nothing for the 10 years.
Interest can build up on a standby note and be paid once the bank loan is repaid. A seller note that is not on standby is also allowed, but it does not count toward your 10%, and the lender adds its payments into the 1.25 test.
How does an SBA loan compare with seller financing or paying cash?
Here is the same $500,000 business paid for four ways. The seller financing terms are our assumption of 30% down, 8% interest and 5 years, and every seller negotiates those terms.
SBA loan
- Your cash into the deal
- $56,662
- Cash on closing day
- $98,662
- Monthly payment
- $6,739
- Paid off in
- 10 years
SBA loan with a seller who waits
- Your cash into the deal
- $28,331
- Cash on closing day
- $70,331
- Monthly bank payment
- $6,739
- Bank paid off in
- 10 years
Seller financing, no bank
- Your cash into the deal
- $205,000
- Cash on closing day
- $247,000
- Monthly payment
- $7,097
- Paid off in
- 5 years
All cash
- Your cash into the deal
- $552,000
- Cash on closing day
- $594,000
- Monthly payment
- None
- Paid off in
- At closing
- What the SBA path gives you: the smallest amount of cash at closing, in exchange for 10 years of payments and the SBA's paperwork and timeline.
- What seller financing gives you: no lender approval and a faster close, with a shorter loan and much less interest overall. Many sellers still ask for a personal guarantee or a lien on your home.
- What paying cash gives you: no loan payments at all. With no lender involved, nobody requires a valuation or checks the seller's tax returns, so plan to arrange those checks yourself.
Each path's total cost differs a little because the SBA path adds lender costs, the guaranty fee and the lender's valuation, and the paths without a bank assume lower legal and accounting fees.
What do you sign for the loan?
- A A promise that you will repay the loan from your own money and assets if the business can't. The SBA requires one from anyone who owns 20% or more.: anyone who owns 20% or more of the business guarantees the whole loan personally. If the business cannot pay, the lender can collect from that person's own assets.
- A A lender's legal claim on property, recorded so the property can't be sold or refinanced without paying the lender. It lets the lender collect from that property if the loan isn't repaid. on real estate, in some cases: if the business's own assets do not fully secure the loan, the lender looks to real estate owned by anyone with 20% or more. That includes your home when you have at least 25% equity in it.
- Your spouse's signature, in some cases: a spouse who owns part of the business also guarantees the loan when the couple together owns 20% or more. A spouse who owns none of it signs only the documents that pledge property you own together.
- Insurance: on most loans over $50,000, everything pledged as Property pledged to the lender to back the loan, such as the business's equipment, inventory and accounts, and in some cases your home. must be insured. On a loan over $350,000, the lender also requires life insurance when the business depends on you and the collateral does not fully cover the loan.
Knowing these terms before you talk to a lender lets you decide in advance what you are comfortable pledging.
What are the steps from first look to closing day?
Most SBA purchases follow the same order. Your lawyer, your accountant and the lender work on several of these steps at the same time.
Figure out which businesses suit you and what you can afford
Decide what kind of work and life you want from owning a business. Then add up the cash you could put in, where it would come from, and what your household needs to live on.
Where we help: Business Fit matches you with kinds of businesses. Financial Fit turns your cash and household spending into a price range, using the rules on this page.
Find a business and screen the listing
Compare each listing with what you want before you spend time on it. When one fits, email the broker, sign a A short agreement promising to keep the seller's information private. Brokers ask for one before sharing the business's name and detailed numbers., and ask for the The broker's detailed write-up of a business, also called a confidential information memorandum. It usually covers the history, staff, customers and several years of financial results. and the business's tax returns. Many brokers also ask for a A form listing what you own and what you owe. SBA lenders use SBA Form 413, and brokers often ask for one to see that a buyer can afford the business. at this point.
Where we help: Deal Fit compares a listing with your Your Business Fit and Financial Fit results together. Deal Fit compares each listing with them., lists what the listing is missing, and gives you an email to send the broker. Your first Deal Fit is free.
Talk to two or three SBA lenders early
Share your personal financial statement, your résumé and the listing's numbers before you make an offer. Lenders who do many SBA purchases can usually tell you early whether a deal looks like one they would finance and how much cash they would want from you.
Sign a letter of intent
A A short document setting out the main deal terms before the full purchase agreement is written. Most of it is usually not binding, but terms such as confidentiality and the seller not talking to other buyers for a set period often are. Have a lawyer review it. sets out the price, how you will pay it, any seller note, how long the seller will help after closing, and how long the seller will stop talking to other buyers while you check the business.
The lender reviews the deal while you check the business
The lender checks the seller's tax returns against IRS records through a The lender asks the IRS directly for the business's tax return records, using IRS Form 4506-C, and compares them with the returns the seller provided. Big differences have to be explained before the loan closes.. It also orders a An estimate of what the business is worth, ordered by and prepared for the lender. Above a $350,000 price it must come from an independent, credentialed appraiser. Its cost can count toward your 10%., runs the 1.25 test, and confirms where your down payment is coming from.
At the same time, your lawyer and accountant carry out The checking you do before closing to confirm the business is what the seller says: the books, contracts, leases, licenses, staff and customers. Your accountant and lawyer usually lead it.. The SBA requires a An accountant's detailed check of whether the business's reported earnings are real and likely to continue. Its cost can count toward your 10%. only at a price of $3,000,000 or more, but many lenders ask for one on smaller deals, and our examples include one.
Get the lender's approval
The lender sends a The lender's written approval of the loan, listing the amount, rate, term and the conditions you must meet before closing. with the loan amount, rate, term and conditions to meet before closing. Your lawyer finishes the purchase agreement with the seller's lawyer.
Close the purchase
You sign the purchase agreement, the loan documents, your personal guarantee and any standby agreement with the seller. You wire your down payment, the guaranty fee usually comes out of the loan, and the business becomes yours.
Once they have a complete package, most lenders take 45 to 90 days to get from review to The day the purchase is completed: documents are signed, money moves, and ownership passes to you..
Run the business and repay the loan
Monthly payments begin under the loan's terms. If you agreed to keep the seller on as a consultant, that period can run for up to 24 months in total.
What will the lender ask you for?
Requests vary by lender, but these items come up on almost every SBA purchase.
- A personal financial statement on SBA Form 413, dated within 90 days of the loan's approval.
- Your personal federal tax returns for recent years.
- SBA Form 1919, the SBA's borrower information form.
- Account statements for wherever your down payment is coming from. Most lenders want at least a month of them.
- A résumé showing your management experience, which most lenders ask for.
- The seller's business tax returns and financial statements, which the lender checks against IRS records.
- The signed letter of intent, and later the purchase agreement.
- A business plan with projections, which many lenders ask for even though they cannot rely on projections for the 1.25 test.
Which numbers will be different in your own deal?
- The 10% is a minimum: lenders often ask for more when you are new to the industry, when the business has a short history, or when most of the price is goodwill.
- The rate: our examples use the most a lender may charge. A real quote may be lower, and a variable rate moves whenever Prime moves.
- Our estimates: lender costs, your attorney, earnings review and valuation, and the cash the business needs on day one are our estimates. Replace them with the lender's fee sheet and your advisors' quotes once you have them.
- The household reserve: six months of spending is our own planning rule, and the SBA does not require it. We include it because a new owner's pay can be uneven in the first months.
- The rules: the SBA updates its rulebook from time to time. This page reflects SOP 50 10 8.1, which applies to loans from October 1, 2026.
Running these numbers for your own situation
The assessments below use the same SBA rules as this guide.
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Business Fit
Find the kinds of businesses that suit the work you enjoy and the life you want.
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Financial Fit
See the price range your cash supports, the cash you'd need at closing and the earnings the business needs.
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Deal Fit
Add a listing to your Deal Locker and see how it compares with your goals, including the 1.25 test.
SBA rules on this page come from the SBA's Standard Operating Procedure 50 10 8.1 with its September 2026 technical updates, which apply to loans from October 1, 2026. You can read the full rulebook at sba.gov. This guide explains how the SBA program works. It is not legal, tax or lending advice, and your lender and lawyer will confirm what applies to your deal.