Understanding Working Capital Requirements for SBA 7(a) Acquisition Loans

When you’re acquiring a business using SBA 7(a) financing, working capital is one of the most important parts of your loan request—and often one of the most confusing. Buyers routinely ask how much working capital they “should” request, whether lenders have a standard amount they expect, and how those funds need to be justified.

The reality is that SBA working-capital requirements are not one-size-fits-all. Lenders evaluate working capital based on the business model, cash conversion cycle, seasonality, and the overall strength of the transaction. SBA rules specify what counts as an eligible use of proceeds, but lenders maintain discretion in determining what is considered “reasonable” for the business being acquired. PCA’s role is to help buyers model these needs, position the rationale clearly, and ensure the request aligns with both the SOP and lender expectations.

This article breaks down how lenders typically evaluate working capital, what buyers should expect during underwriting, and how to set up your deal for the best chance of approval.

What Working Capital Covers in SBA 7(a) Acquisition Loans

Under the SBA 7(a) program, working capital is considered an eligible use of proceeds when it supports “everyday business operations and short-term operational needs,” including expenses like payroll, inventory, supplies, and other recurring obligations. 

These uses fall under eligible working-capital categories noted in SBA SOP 50 10 8, which allows working capital for operating expenses as long as proceeds benefit the ongoing business and do not refinance existing debt or fund ineligible purposes.

In practical terms, working capital may cover items such as:

• Initial payroll after closing
• Inventory replenishment
• Rent and utilities
• Vendor deposits or upfront payments
• Technology, software, and tools used in day-to-day operations
• Early transitional costs following the acquisition

Lenders want to ensure the business has enough runway after closing to operate while cash flow stabilizes under new ownership. This is especially important for businesses with long receivable cycles or variable monthly revenue.

How Lenders Determine “Reasonable” Working Capital

While SBA defines eligible uses, lenders ultimately decide what is “reasonable.” Different lenders may have different preferences, but most follow consistent principles:

1. Cash Conversion Cycle

A business with slow customer payments (e.g., B2B services, government contracting) typically requires more working capital than a business with immediate point-of-sale revenue. Lenders will look at:

• Accounts receivable days
• Accounts payable days
• Inventory turnover

A long cash cycle usually justifies a higher request.

2. Monthly Fixed Costs

Lenders often size working capital based on 1–3 months of typical expenses depending on deal risk, revenue consistency, and whether the business retains recurring contracts.

3. Seasonality

Seasonal businesses may need a larger cushion to cover off-peak periods. Lenders expect working-capital assumptions to reflect historical patterns and industry norms.

4. Pro Forma Cash Flow and DSCR

A working-capital request must support—never artificially boost—the deal’s projected debt service coverage ratio (DSCR). Lenders focus on the business’s sustainable cash flow, not temporary liquidity injections.

5. Post-Closing Transition Needs

Working capital can also be justified when:

• A business is expanding service lines
• A buyer is inheriting large vendor deposits
• Certain staff or contracts require upfront payments

Each justification must be reasonable, consistent with past operations, and clearly explained in the lender package.

At Pioneer Capital Advisory, this analysis is built directly into our lender-ready materials, helping lenders quickly understand the story of the deal and why the working-capital request is appropriate.

How Working Capital Fits Into the Sources & Uses of Funds

In an SBA acquisition, working capital is included in the total “Uses of Funds” alongside the purchase price, closing costs, and any required inventory or equipment purchases. Lenders evaluate whether the overall structure fits SBA requirements and whether each line item benefits the business being acquired.

Working capital is typically deployed as a lump sum at closing, but lenders may structure it differently depending on risk:

• Fully disbursed at closing
• Held back and released upon need
• Tied to receipts or seasonal cycles

The SBA SOP allows working capital as part of a change-of-ownership loan as long as the funds support ongoing operations and follow the rules for eligible uses of proceeds during acquisition financing .

How Much Working Capital Should Buyers Request?

Buyers often ask whether they should request a standard amount—$100K, $200K, or more. The answer depends heavily on the business.

Here are common guidelines PCA uses when preparing acquisition packages:

1. Start with Actual Monthly Costs

Most buyers underestimate monthly cash needs. PCA helps clients validate expenses across:

• Payroll
• Rent
• Vendor payments
• Insurance
• Software and subscriptions
• Loan payments (if assumed by the business)

2. Identify Cash Flow Timing Gaps

If the business collects payment 30–60 days after service delivery, working capital must fill the gap until receivables mature.

3. Account for Transition Risk

Even well-run businesses can experience softening during ownership changes. A modest cushion can stabilize operations without overinflating the loan request.

4. Avoid Overstating the Request

Lenders may reduce or reject working-capital requests that appear arbitrary or inflated. PCA helps buyers justify requests tied to historical financials and industry expectations.

For many acquisitions, working capital might range from 1–3 months of operating expenses, but outliers exist when cash cycles or seasonality require more.

How Working Capital Is Evaluated During Underwriting

Once the loan package is submitted, lenders review working-capital needs as part of a broader underwriting analysis that includes:

• Historical financial performance
• Margin stability
• DSCR and global cash flow
• Revenue volatility
• The buyer’s experience in the industry
• Strength of transition plans

Most importantly, lenders want evidence that the business can comfortably service debt under realistic conditions—working capital simply supports that stability, not substitute for it.

PCA’s packaging work includes a lender-ready model and sources-and-uses breakdown to streamline this process, reducing the back-and-forth that often delays underwriting.

How PCA Helps Buyers Get Working Capital Right

Working-capital justification is a core part of PCA’s advisory model. Our support includes:

1. Reviewing Historical Financials

We identify cash-cycle patterns, seasonality, and expense trends that lenders typically examine during underwriting.

2. Pro Forma Modeling

PCA models 12–24 months of projected cash flow, integrating the working-capital request into DSCR and operational planning.

3. Clear, Lender-Aligned Rationale

PCA crafts a narrative lenders can easily follow, tying the working-capital request to real business needs and SOP-compliant use of proceeds.

4. Matching Buyers to Lenders

Different lenders view working-capital ranges differently. PCA ensures your package is presented to lenders most aligned with the size and structure of your deal.

This approach helps buyers avoid delays, unnecessary reductions, or misunderstandings around working capital during the financing process.

Conclusion

Working capital is more than a line item in the SBA sources and uses—it’s a key factor in whether a post-acquisition transition goes smoothly and whether lenders feel confident in approving the loan. When structured correctly and justified clearly, working-capital funds help stabilize operations and support long-term success.

At Pioneer Capital Advisory, we guide business buyers from LOI through closing with lender-ready working-capital models that align with SBA rules and lender expectations. If you’re preparing to acquire a business and want clarity around working-capital sizing, PCA is here to help.