Comparing the SBA 7(a) Loan to Other Acquisition Financing Options

When buying a business, one of the most important decisions you will make is how to finance the acquisition. For many acquisition entrepreneurs, the SBA 7(a) loan is the go-to option—but it’s not the only one. In this post, we compare the SBA 7(a) loan to other common business acquisition financing methods, so you can make an informed decision based on your goals and deal structure.

The SBA 7(a) Loan: A Quick Overview

The SBA 7(a) loan is a government-backed financing option offered by participating lenders. It is especially popular for small business acquisitions because of its favorable terms, flexible structures, and lower equity requirements. Key features include:

• Up to 90 percent loan-to-purchase financing
  
• 10-year repayment terms for business acquisitions
  
• Competitive interest rates
  
• Option to include working capital
  
• Lower down payment requirements 10%
  

The SBA guarantees a portion of the loan, reducing risk for lenders and increasing borrower access.

Seller Financing

Seller financing occurs when the seller of the business agrees to “carry a note” for a portion of the purchase price. There is no SBA rule that sets a strict percentage limit on seller financing — it can vary widely depending on the deal. What matters is how the note is structured. If it is placed on full standby for the life of the SBA loan, it can count toward up to half of the required equity injection. If it is not on standby, it is treated as additional debt and factored into the borrower’s repayment capacity and DSCR.

Pros:

• Aligns seller’s incentives with buyer success
  
• Can reduce the need for third-party financing
  
• Flexible terms
  

Cons:

• Seller must trust the buyer and the business outlook
  
• May not cover the full purchase price
  
• Typically shorter terms and higher interest rates than SBA loans
  

Seller financing is often used in conjunction with SBA loans as part of the buyer equity injection.

Conventional Bank Loans

Traditional commercial loans from banks can also be used for business acquisitions, though they often require:

• Higher down payments (25 to 40 percent)
  
• Strong credit and business experience
  
• Solid collateral or existing assets
  

Pros:

• No SBA paperwork or government review
  
• Useful for larger acquisitions or established buyers
  

Cons:

• Higher equity and collateral requirements
  
• Shorter terms, leading to higher monthly payments
  
• Less accessible for first-time buyers
  

Private Equity or Investor Capital

Some buyers turn to private investors or small private equity funds for acquisition financing. This can involve equity (giving up ownership) or debt (repaying with interest).

Pros:

• Useful for larger deals
  
• Can offer strategic support or experience
  

Cons:

• Loss of equity or control
  
• May involve complex legal agreements
  
• Pressure for returns and performance
  

Rollover Equity in SBA Transactions

In some cases, a buyer and seller may agree to structure a deal with rollover equity, where the seller retains a minority ownership stake after closing. This can help align interests, provide continuity during the transition, and give the seller a chance to participate in the company’s future upside.

It’s important to note that while rollover equity may be permitted under SBA rules (as long as the buyer acquires at least 51% controlling interest and retains full operational control), earnouts are not allowed in SBA 7(a) loan transactions. SBA requires that the full purchase price be determined and documented at closing, without future performance-based adjustments.

When structured correctly, rollover equity can be used alongside other financing methods such as SBA loans and seller notes to reduce upfront capital needs while keeping all parties invested in the long-term success of the business.

How the SBA 7(a) Loan Compare

‍For first-time buyers and small business acquisitions, the SBA 7(a) loan usually offers the best balance of:

• Low equity requirements
  
• Long repayment terms
  
• Competitive interest rates
  
• Wide lender availability
  

Unlike private equity or conventional loans, the SBA process may take more time and require detailed documentation, but the benefits are often worth it—especially for smaller transactions under $5 million.

What’s the Best Option for You?

The right financing option depends on your experience, capital, deal size, and risk tolerance. For many buyers, a blended structure — such as an SBA loan combined with seller financing, offers flexibility while staying compliant with SBA rules. Seller financing can reduce the upfront cash requirement and keep the seller invested in the business’s future, but the terms must be carefully structured to meet SBA guidelines.

If you are unsure, working with a loan broker or M&A advisor can help you evaluate options and run deal comparisons.

Explore Related Resources

• SBA 7(a) Loan vs Conventional Loan
  
• Structuring Seller Notes
  
• Rollover Equity in Business Acquisitions
  
• Building a Capital Stack for Acquisition
  

Final Thoughts‍

There’s no one-size-fits-all approach to acquisition financing. But for many entrepreneurs, the SBA 7(a) loan stands out for its accessibility, flexibility, and buyer-friendly terms. At Pioneer Capital Advisory, we help buyers navigate the financing landscape and pair each deal with the structure that fits best.