How to Use an SBA Loan to Buy a Business: Funding Your Acquisition the Right Way

SBA loans have become the go‑to solution for entrepreneurs looking to buy existing businesses. With low down payments, longer terms and competitive interest rates, the SBA 7(a) program enables buyers to leverage a relatively small equity contribution into a multimillion‑dollar acquisition. But using an SBA loan effectively requires more than filling out an application. You need to understand what the loan can pay for, how to structure your deal and what lenders expect. This guide outlines how to use an SBA loan to fund a business purchase—without surprises.

Eligible Uses of SBA Loan Funds

The SBA allows 7(a) loan proceeds to finance a broad range of acquisition‑related costs:

• Purchase price of the business. Whether you’re buying assets or stock (subject to SBA change‑of‑ownership rules), loan funds can cover the purchase price.
  
• Working capital. SBA loans can include funds for initial working capital such as inventory, payroll and operating expenses. Adequate working capital ensures you can run the business smoothly post‑closing.
  
• Equipment and inventory. You can finance equipment purchases or necessary inventory upgrades as part of the transaction.
  
• Professional fees and closing costs. The SBA permits you to roll legal fees, appraisals, environmental reports, quality of earnings reports and the SBA guaranty fee into the loan.
  
• Real estate or leasehold improvements. If the acquisition includes real property, the loan can finance it or fund necessary improvements.
  

SBA loans cannot be used for passive investments, speculations or refinancing personal debt. Make sure your sources and uses statement clearly allocates funds in accordance with SBA policy.

Structuring the Deal

To maximize the benefits of an SBA loan, structure your deal carefully:

• Equity injection. SBA rules require at least 10 percent of the total project cost as equity. At least half must be cash from you or investors; up to 5 percent can come from a seller note on full standby for the life of the loan.
  
• Seller notes. A subordinated seller note can bridge valuation gaps and reduce your cash requirement. If the note counts toward the equity injection, it must be on full standby for the life of the loan.
  
• Investor equity. If raising capital from investors, ensure their rights are subordinate to the SBA lender. Investors owning 20 percent or more must personally guarantee the loan.
  
• Collateral. SBA loans are typically secured by the business’s assets and, if necessary, personal assets. Be prepared to pledge collateral and sign personal guarantees.
  
• Debt service coverage. Lenders look for a DSCR of at least 1.25×. Build conservative projections to show that the business’s cash flow can comfortably service debt.
  

Navigating the Loan Process

1. Pre‑qualification. After signing a letter of intent, assemble your financial package—business and personal financials, sources and uses, projections and resume. Engage a broker to match you with the right lenders.
   
2. Application. Submit your package to selected lenders. Provide three years of tax returns, year‑to‑date financials and a personal financial statement. Be prepared to explain any anomalies.
   
3. Underwriting. Lenders conduct due diligence on the business’s cash flow, management team and industry. They may request a business valuation (mandatory if goodwill exceeds $250,000) and a quality of earnings report.
   
4. Commitment. Once satisfied, the lender issues a commitment letter detailing the loan amount, rate, term and conditions. You’ll need to meet requirements like obtaining UCC lien releases, environmental reports or landlord consents.
   
5. Closing and disbursement. Sign loan documents, finalize the purchase agreement and close the transaction. Funds are disbursed to the seller or escrow account.
   

Tips for Success

• Start early. Engage lenders and advisors soon after the LOI. SBA loans can take 45 to 90 days from application to funding.
  
• Stay organized. Provide complete documentation promptly. Incomplete packages delay underwriting.
  
• Budget realistic working capital. Underestimating working capital needs can strain cash flow. Include adequate reserves in your loan.
  
• Communicate with the seller. Coordinate on seller note terms, tax allocations and closing timelines. Clear communication avoids last‑minute surprises.
  

Partner With Pioneer Capital Advisory

At Pioneer Capital Advisory, we specialize in SBA acquisition financing. We help buyers prepare loan packages, understand eligible uses of funds, structure deals with seller notes and investor equity and navigate underwriting. Our experience ensures your loan aligns with SBA guidelines and your business’s needs.

Ready to Use an SBA Loan?

Using an SBA loan to buy a business can be transformative—but only if you know how to wield it. Plan your capital stack, document your projections and meet SBA requirements. Contact us to discuss your acquisition goals and learn how we can help you secure and use your SBA loan effectively.