Small business acquisition financing: how a deal's money fits together
Short answer
Small business acquisition financing usually has three layers: buyer equity (at least 10% for an SBA initial acquisition), a senior loan (most often SBA 7(a)), and sometimes a seller note. The lender sizes the senior loan from the business's verified cash flow and, in SBA deals, caps total debt at an independent valuation. Everything else has to be equity or seller money.
Write it out as a sources-and-uses table before you sign an LOI; it shows immediately whether the deal works.
Financing a business purchase is a puzzle with a fixed outer edge. The uses (price, working capital, costs) are what they are. The sources have to add up to the same number, and each source has rules about how big it can be.
Sources and uses: a worked example
Illustrative example, not a real deal
A buyer agrees to purchase a business for $1,500,000. Verified EBITDA after a market salary for the buyer is $330,000.
| Uses | Amount | Sources | Amount |
|---|---|---|---|
| Purchase price | $1,500,000 | Buyer cash | $100,000 |
| Working capital | $80,000 | Seller note, full standby | $75,000 |
| Closing and diligence costs | $70,000 | Seller note, amortizing | $150,000 |
| SBA 7(a) loan | $1,325,000 | ||
| Total uses | $1,650,000 | Total sources | $1,650,000 |
Checks: required equity is 10% of $1,650,000 = $165,000. Buyer cash ($100,000) plus standby note ($75,000) is $175,000, and the standby note is under half of the required $165,000 ($82,500). Debt service: the SBA loan at an example 10.5% over 10 years costs about $214,500 a year; the amortizing seller note at an example 6% over 5 years about $34,800. Total ≈ $249,300. Coverage: $330,000 ÷ $249,300 ≈ 1.32, above 1.25. The lender's valuation must also support the $1.5 million price, and total debt including the paying seller note ($1,475,000) can't exceed it.
The constraints on each layer
- Equity: at least 10% of total project cost for SBA initial acquisitions; at least half from unlimited sources. See SBA equity injection.
- SBA loan: sized so earnings cover all debt service at 1.25 or more; max 10-year amortization for the business. See DSCR.
- Total debt: in SBA deals, can't exceed the business valuation, counting seller debt not on full standby.
- Seller notes: subordinated to the senior lender; standby notes count as equity within limits; paying notes count as debt.
- Real estate: if included, structured as a separate loan or blended, with its own appraisal.
When the pieces don't fit
If coverage is short, the valuation is low, or your cash is thin, the only levers are a lower price, more equity, more seller standby debt (within limits), or longer seller note terms. Before reaching for structure, re-check the earnings: if the seller's figure included shaky add-backs, the deal may simply be priced too high. See add-backs.
How to get money to buy a business
Most small business purchases are funded with a mix: your own cash for the down payment, an SBA 7(a) loan for most of the price, and often a seller note for part of the rest. Other sources include conventional bank loans for strong deals, outside investors, retirement funds through a ROBS structure, and home equity.
Lenders lend against the business's verified cash flow, so the fastest way to get funded is to bring a deal whose earnings hold up under scrutiny.
When people ask where to get money to buy a business, they usually mean: who will lend me most of the price? The answer for most small deals is an SBA-guaranteed lender. But the loan is only one layer. Here's every common source, roughly in the order you'll encounter them.
The funding sources compared
| Source | Typical role | What it costs you | Watch out for |
|---|---|---|---|
| Your cash | Down payment (equity injection) | Opportunity cost; at risk first | Keep a personal reserve too |
| SBA 7(a) loan | Most of the price, plus working capital and costs | Interest, SBA guaranty fee, personal guarantee | Max 10-year term for the business; valuation and DSCR limits |
| Conventional bank loan | Strong deals with hard assets or experienced buyers | Interest; often bigger down payment | Shorter terms, less appetite for goodwill |
| Seller note | Bridges price gaps; aligns the seller | Interest to seller; possibly standby | Standby rules in SBA deals |
| Investors | Extra equity | Ownership and profit share | SBA limits on minority investor equity |
| Retirement funds (ROBS) | Equity without a taxable distribution | Setup and compliance costs; retirement risk | IRS scrutiny; complex rules |
| Home equity or personal loans | Equity, only if repaid from outside the business | Interest; your home at risk | SBA counts it only if repayment isn't from business cash flow |
| SBA 504 | Real estate or major equipment bought with the business | Interest; project structure | Not a fit for goodwill alone |
How lenders decide how much to lend
Lenders don't lend a percentage of the asking price. They lend what the business can repay. For SBA change-of-ownership loans under SOP 50 10 8.1, that means:
- Earnings (EBITDA, with justified adjustments) must cover all debt payments at least 1.25 times for an initial acquisition.
- Total debt can't exceed the lender-ordered business valuation.
- Tax returns are verified against IRS transcripts, and every add-back needs justification.
So the amount you can raise is mostly decided by the business's verified earnings. Use the DSCR calculator to see what a given price implies.
A sensible order of work
- Know your liquid cash and what you need to live on.
- Talk to two or three SBA lenders who do acquisition loans; ask what they need from you and what deal size you qualify for.
- Decide whether you'll bring investors, and on what terms, before you're under LOI.
- When you find a deal, verify earnings first (SDE, proof of cash), then structure the financing around what holds up.
- Negotiate a seller note if there's a gap, and agree whether it's on standby.
For the deeper versions: SBA 7(a) for acquisitions, seller financing, investors, and ROBS.
Seller financing under the SBA rules
Seller notes are common in small deals, and an SBA lender will look closely at how yours is written. Under SOP 50 10 8.1 (as of October 2026), a seller note can count toward your required equity injection only if it is on full standby, meaning no payments of principal or interest for the term of the SBA loan, and limited sources like this can make up no more than half of the required injection. A note that is not on standby counts as debt: its payments go into the debt service coverage calculation, and total debt is limited to the business valuation. Seller earnouts are not allowed in a 7(a) change of ownership.
Illustrative example, not a real deal
Project cost is $1,000,000, so the minimum injection is 10%, or $100,000. A seller note on full standby can cover at most half of that, $50,000. The other $50,000 has to come from an unlimited source such as your own cash. If the seller instead wants $50,000 paid over five years starting now, it is no longer equity: you need the full $100,000 from your own sources, and the note's payments count against coverage.
Documents a lender asks for
- Three years of the business's tax returns, year-end financials and interim statements.
- Your personal tax returns, personal financial statement and resume.
- The signed LOI or purchase agreement, and the seller's note terms if any.
- Proof of your injection and where it came from.
- The lease, or the landlord's consent to assignment.
- Your business plan and projections, though lenders may not rely on projections to meet coverage on a change of ownership.
Frequently asked questions
What is a sources and uses table?
A two-column summary of where the money comes from (equity, loan, seller note) and where it goes (purchase price, working capital, closing costs). The two totals must match.
What's senior debt?
The loan that gets paid first and has first claim on the business's assets, usually the SBA or bank loan. Seller notes are typically subordinated to it.
Can I combine SBA 7(a) and 504 loans?
When real estate is part of the purchase, the SBA allows the business and real estate to be financed as separate loans, including through the 504 program, or blended under 7(a). Ask your lender which structure fits.
Why did the lender offer less than I asked for?
Usually because verified earnings don't cover the requested debt at the required coverage, or the valuation came in below the price. The gap must be filled with equity or a lower price.
What is the most common way to finance a small business purchase?
For Main Street deals, an SBA 7(a) loan combined with buyer cash and sometimes a seller note. The SBA guarantee lets lenders finance goodwill, which conventional loans often won't.
How much of my own money do I need?
For an SBA initial acquisition, at least 10% of total project cost, with at least half of that from unlimited sources such as your own unborrowed cash. Conventional lenders often want more.
Sources
- SBA SOP 50 10 8.1, Appendix 15 (debt cap, DSC, real estate structuring, equity)
- SBA: 504 loans
- SBA: 7(a) loans
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.