How to Buy a Business with an SBA Loan (Beginner’s Guide)
Learn how to buy a business with an SBA 7(a) loan. From pre-approval to closing, this beginner’s guide explains SBA loans and the buying process.
Thinking about how to buy a business but don’t have millions sitting in the bank? That’s exactly why the Small Business Administration (SBA) created the SBA 7(a) loan program. With as little as 10% down and repayment terms up to 10 years, you can use the cash flow of the business you’re buying to pay back the loan.
These loans are issued by banks but guaranteed by the SBA—up to 85% of the loan balance. That guarantee gives lenders confidence to finance deals that include a lot of “goodwill” (intangible value without collateral). And the program works: default rates are historically low, with cumulative charge-offs on SBA 7(a) loans generally below 1.5%.
In short, the SBA 7(a) loan is the most common way to buy a business in the U.S.—and this guide will show you how.
How to Buy a Business with an SBA Loan
Step 1: Get Pre-Approved
Your first move is getting pre-approved by an SBA lender. Pre-approval sets your budget, makes you credible to sellers, and speeds up negotiations. Many business brokers won’t take you seriously without an SBA pre-qualification letter.
Tip: Tupelo can help you get pre-approved for SBA financing—click here.
Step 2: Find the Right Business
Focus on companies with steady cash flow, clean financial records, and industries you understand. Lenders want businesses that can comfortably cover loan payments (measured by Debt Service Coverage Ratio).
Step 3: Structure the Deal
Most SBA 7(a) deals follow a three-part structure:
Buyer down payment – ~10% of the purchase price.
Seller financing – Often ~10%, structured as a note.
Bank financing (SBA loan) – The lender covers the remaining 80%.
Example: For a $1,000,000 acquisition:
- Buyer down payment: $100,000
- Seller financing: $100,000
- SBA loan (bank financing): $800,000
Working capital and closing costs can also be included in the SBA loan.
Step 4: Submit Your Loan Application
Once you sign a Letter of Intent (LOI), you’ll formally apply for your SBA loan. Expect to provide things like:
- Personal financial statements
- SBA Forms 413 and 1919
- Citizenship or residency proof
- Two to three years of personal tax returns
- Resume or proof of management experience
- Business purchase agreement or LOI
- Business plan outlining transition and growth strategy
Step 5: Underwriting and Approval
Your lender reviews the deal and submits it to the SBA (unless they are a Preferred Lender Program (PLP) lender, in which case they can approve in-house). PLP lenders can shave weeks off the process compared to general program lenders.
Step 6: Close the Deal
If approved, funds are released at closing: the seller gets paid, the loan funds are disbursed, and ownership officially transfers. Typical SBA loan closings take 60–90 days.
Key Facts About the SBA 7(a) Loan Program
- Loan amounts up to $5,000,000
- Personal guarantee required (often backed by real estate or investment accounts)
- Borrowers must be U.S. citizens or lawful permanent residents
- Business must meet a minimum DSCR of 1.15× (1.25× preferred)
- Personal financial requirements:
- Credit score 680+
- Liquidity and net worth sufficient for down payment and reserves
- Business requirements:
- Stable profitability and clean records (3 years tax returns)
- Management requirements:
- Relevant experience or strong transition plan
Conclusion: Using an SBA Loan to Buy a Business
If you’ve ever wondered how to buy a business without draining your savings, the SBA 7(a) loan is the answer. With low down payments, flexible terms, and government backing, these loans make it possible for thousands of entrepreneurs each year to become business owners.
The process takes planning, paperwork, and patience, but it’s worth it. By using an SBA loan to buy a business, you can leverage bank financing and the company’s own cash flow to build wealth and step into ownership.