Business Acquisition Loans: The Five Ways Buyers Fund a Deal

1. SBA 7(a) — the default for Main Street

The 7(a) program is the reason ordinary buyers can purchase profitable service businesses at all. A conventional bank lends against assets; a 7(a) lender, with a federal guaranty behind part of the loan, will lend against cash flow, which is what a business made mostly of goodwill actually has.

What it looks like in practice: up to $5 million, ten-year amortization for a business acquisition without real estate (longer when significant real estate is included), no balloon payment, a variable rate typically pegged to prime plus a spread, a minimum 10% equity injection, and a personal guarantee from every owner above the ownership threshold. There is a guaranty fee that scales with loan size and term, and it is usually financed.

What it costs you that is not money: time and paperwork. Sixty to ninety days from a complete file is normal. You will produce three years of the seller's returns, interim financials, a business valuation, a lease or lease assignment, your personal financial statement, and a business plan with projections. The full 7(a) walkthrough covers the underwriting tests in detail; the down payment page covers how much cash you actually need to produce.

Use it when: the target is a profitable operating business with two or three years of documented earnings and the value sits in goodwill, customer relationships, or contracts rather than equipment.

2. Conventional bank term debt

A straight commercial loan from a bank, with no federal guaranty. Faster than SBA, cheaper in fees, often a lower rate, and frequently a shorter amortization — five to seven years is common — sometimes with a balloon.

The catch is what the bank will lend against. Without a guaranty absorbing part of the loss, a bank wants collateral coverage. That works for a manufacturer with machinery, a trucking company with a titled fleet, or any acquisition that includes real estate. It works poorly for an agency, a services firm, or a route business whose balance sheet is thin, because the bank is being asked to lend against something it cannot repossess.

The shorter amortization also compresses coverage. The same purchase price over seven years instead of ten means a materially larger annual payment, and a business that clears a 1.25 coverage ratio on a ten-year SBA note can fail it on a seven-year conventional one. Run the coverage math on the actual term before you assume the cheaper loan is the better loan.

Use it when: there are hard assets or real estate in the deal, your relationship bank already knows you, and the cash flow has enough headroom for a shorter schedule.

3. Seller financing

The seller carries a note for part of the price and you pay them over time. This is the most underrated instrument in small-business acquisition, for three reasons: it is available on almost every deal, it costs nothing to originate, and it is the only form of financing that makes the seller's ongoing cooperation a matter of self-interest.

Typical structures run from 10% to 30% of the price at rates in the neighborhood of prime, amortized over three to seven years, sometimes with a standby period. Inside an SBA deal there are two distinct roles a seller note can play: on full standby for the life of the SBA loan, it can count toward up to half of your required equity injection; on partial standby or normal amortization, it does not count toward the injection but still reduces the amount of bank debt you need. Our seller financing page covers the terms in detail, including the right of offset that lets you reduce note payments if the seller's representations turn out to be false.

Use it when: always ask. A seller unwilling to carry any paper is telling you something about their confidence in the business, and that information is worth the awkward question.

4. Unsecured, online, and revenue-based lenders

Fast money at a real price. Online term lenders and revenue-based financiers can fund in days rather than months, with light documentation, but the effective cost is far above bank pricing and terms are short — often 6 to 24 months, sometimes with daily or weekly debits rather than monthly payments.

As the primary financing for an acquisition, this is almost always a mistake: the payment schedule is designed for a merchant smoothing receivables, not for a buyer absorbing an ownership transition. As a small, deliberate slice — funding an equipment repair discovered in diligence, or bridging a working capital gap in month two — it can be defensible. Be aware that an SBA lender will scrutinize any other debt in the buying entity, and taking on a high-cost line during underwriting can damage your coverage ratio and your credibility at once.

Use it when: small, short, and specific. Never as the foundation of the stack.

5. Investor equity and search-fund style capital

Rather than borrowing the gap, sell part of it. An investor funds some or all of the equity injection in exchange for ownership in the buying entity. This is the standard model for search funds and it appears constantly in independent acquisitions dressed as a "partner."

The advantages are real: no payment obligation, no personal exposure on that slice, and often an experienced partner who has done this before. The costs are equally real. You are giving away a permanent share of the upside on the thing you are about to spend five years building, governance gets complicated, and — the detail buyers miss — an investor whose stake crosses the ownership threshold will generally be required to personally guarantee the SBA loan. Investors who expected to be passive frequently decline at that point, which is why the guarantee question belongs in the first conversation.

Use it when: the deal is bigger than your cash, the business genuinely benefits from the partner's expertise, and you would rather own less of something good than all of something small.

Stacking: how deals actually close

Almost no acquisition of consequence is financed by one instrument. The common shape on a Main Street deal is roughly 80% SBA 7(a), 10% standby seller note counting toward the injection, and 10% buyer cash — occasionally with a modest earnout tied to retention of a concentrated customer.

Each piece is doing something the others cannot. The SBA note supplies long amortization against goodwill. The standby seller note supplies cheap capital and keeps the seller invested in a clean handoff. The earnout moves the risk of a specific uncertainty onto the party who knows the answer. Buyer cash supplies the lender's proof that you have something to lose.

Design the stack before you negotiate the price, because the structure and the price are the same conversation. A seller who will not carry paper is effectively asking for a lower number, and a seller who will carry a decade of standby paper has earned a higher one.

What underwriters are actually testing

• Debt service coverage. Adjusted historical cash flow divided by total new annual debt service, with lenders typically wanting 1.15 to 1.25 or better. Note that the coverage test uses historical earnings, not your projections — an optimistic plan does not fix a business that cannot cover the note today.
• Owner compensation. The lender subtracts a reasonable salary for you before testing coverage. Buyers modelling their deal without that deduction routinely overestimate how much debt the business supports.
• Management experience. Direct industry experience is the strongest form. Adjacent operating experience plus a retained key manager is often enough. No relevant experience at all is where injections get raised.
• The quality of the seller's books. Cash-basis records, unexplained add-backs, and revenue concentrated in two customers all reduce what a lender will advance — and all show up in a proper diligence process before they show up in a declination letter.
• The lease. On a location-dependent business, lenders generally want the lease term (including options) to run at least as long as the loan. An unassignable or short lease can stop an otherwise clean file.

Sequence that saves you a month

Get pre-qualified before you write an offer. Bring a lender a rough profile of what you are looking for and your personal financial statement, and get their injection policy and coverage requirements in writing. Then when a target appears, you already know whether it is fundable and on what terms — and your letter of intent can specify a structure the bank has already told you it will accept. Buyers who reverse that order spend their exclusivity period discovering that the deal they signed cannot be financed the way they promised.

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