Acquisitions
SBA vs. Conventional vs. Seller Financing to Buy a Business
Most acquisitions are financed with some mix of a bank loan and seller financing, and the bank loan may or may not carry an SBA guaranty. Here's how the three compare, and why the right answer is often a combination.
Key facts
- An SBA 7(a) loan for a business purchase is fully amortizing with no balloon, and the business-purchase portion amortizes over no more than 10 years.
- Conventional acquisition loans are set by each lender's policy and commonly ask for more equity, shorter terms or more collateral.
- Seller financing is negotiated directly with the seller and can sit alongside either kind of bank loan.
- For an SBA loan, the lender has to document that comparable credit isn't available to you elsewhere on reasonable terms.
- The cheapest-looking option isn't always the cheapest: compare total cost, cash required and what happens at maturity.
Written for larger, structured projects: acquisitions, owner-occupied real estate and expansion. For quick capital or small short-term needs, your local SBDC or a nonprofit lender is usually a better first call.
The short version
There are three common ways to pay for a business, and most deals use two of them together:
- An SBA 7(a) loan: a bank or other lender makes the loan, and the SBA guarantees part of it to the lender. Program rules set the structure; the lender decides whether to lend.
- A conventional bank loan: no SBA guaranty. The lender’s own credit policy sets the terms.
- Seller financing: the seller accepts part of the price over time as a note.
Which fits depends on how much cash you have, how much collateral the business and you can offer, how the cash flow looks, and what the seller will accept. Here’s how they compare.
Side by side
| SBA 7(a) loan | Conventional bank loan | Seller financing | |
|---|---|---|---|
| Who sets the terms | Lender, within SBA program rules | Lender’s own policy | You and the seller |
| Repayment shape for the business purchase | Fully amortizing, no balloon; business-purchase portion amortizes over no more than 10 years | Varies; shorter terms or balloons are common | Whatever you negotiate |
| Cash you bring | A program minimum applies to purchases; see equity injection | Set by lender policy; often more | Negotiated; often part of a larger structure |
| Collateral | Lender takes available collateral; a shortfall leads to personal real estate where available | Often stricter; may need more hard collateral | Usually a subordinate lien, if any |
| Can finance goodwill? | Yes, if due diligence supports it | Varies; many lenders limit it | Yes, by definition |
| Extra costs | SBA guaranty fee, which the lender may pass to you | Lender’s own fees | Interest to the seller; legal costs |
| Paperwork and process | Program forms, valuation, more steps | Usually lighter | Lightest |
| Seller after closing | Limits on the seller staying in a full purchase | Lender’s preference | Negotiated |
Table sources (SBA column): loan terms, intangible assets, collateral and seller rules are from SOP 50 10 8.1 Appendix 15; the guaranty fee is from the 7(a) fee section of the same SOP. Amounts change, so we don’t quote them here.
Where an SBA loan tends to fit
- You have less cash than a conventional lender would want. The SBA minimum equity for a purchase is often lower than a conventional lender’s own requirement.
- The business is mostly goodwill. Service businesses, practices and agencies with few hard assets are hard to finance conventionally.
- Payment size matters. A long, fully amortizing term can mean a lower annual payment than a shorter conventional loan, which can be the difference in coverage.
Tradeoffs: an SBA guaranty fee, more documentation, specific rules on equity, seller notes and the seller’s role, and a lender that must document why conventional credit on reasonable terms isn’t available. The 7(a) guide explains the program.
Where a conventional loan tends to fit
- You have meaningful equity and the business has solid hard assets.
- You want the seller to stay longer or in a role the SBA rules don’t allow.
- The structure includes features SBA rules prohibit, such as an earnout. (See earnout.)
- Speed and simplicity matter more than the lowest payment.
Watch the repayment shape. A conventional loan with a short maturity and a balloon can show a low payment that hides a refinancing you’ll need in a few years.
Where seller financing fits
Seller financing is rarely the whole answer for a larger business, but it’s part of many deals:
- Bridging a price gap. If the cash flow supports a bank loan smaller than the price, a seller note can cover part of the difference, as long as total payments still fit.
- Reducing your cash. In an SBA deal, a seller note on full standby (no principal or interest payments for the term of the SBA loan) may count toward the equity injection, limited to no more than half of the required amount together with other limited sources.
- Keeping the seller invested in a smooth handover.
What to watch: a paying seller note adds to your debt service, and under SBA rules any seller debt that isn’t on full standby counts against the business valuation limit on total debt. See equity injection and seller notes and the seller note entry.
Hypothetical example
A buyer is purchasing a business for $1,500,000 with $1,650,000 total project cost. Two structures:
- SBA: the buyer brings $165,000 (10% of project cost) in cash; the SBA loan is the rest, about $1,485,000, amortizing over 10 years. Assumed annual payment: $235,000.
- Conventional plus seller note: the bank lends $1,050,000 over 7 years with assumed payments of $195,000; the seller carries $300,000 over 5 years with assumed payments of $70,000; the buyer brings $300,000. Total annual payments: $265,000, and a lot more cash in.
With cash flow available of $340,000, the SBA structure covers its payments about 1.45 times and the conventional structure about 1.28 times, but the conventional route avoids the SBA guaranty fee and leaves the buyer with no SBA-specific restrictions. Neither is “right”; it depends on how much cash the buyer has and wants to keep. All numbers are invented, including the payments.
How to decide
- Start with the cash flow: what annual payment can the business support with room to spare? See how lenders calculate cash flow.
- Then the cash: how much can you put in and still have reserves?
- Then the seller: what will they accept, and do they want to stay involved?
- Compare total cost over the period you expect to own the business, not just the first-year payment.
Run both versions in the acquisition calculator. Partner buyouts have their own rules; see the partner buyout guide. And if you’d like the options laid out side by side for your deal, tell us about it. We’ll include the paths that aren’t an SBA loan.
Common questions
Is an SBA loan always better than a conventional loan for buying a business?
No. An SBA loan often requires less cash and offers a longer, fully amortizing term than a conventional loan, which can mean a lower payment. But it adds an SBA guaranty fee and program requirements. A buyer with substantial equity and strong collateral may find a conventional loan simpler.
Can I combine seller financing with an SBA loan?
Yes, it's common. A seller note can be on full standby, in which case it may count toward your equity within limits, or it can make regular payments, in which case those payments count against your cash flow. The seller note is subordinate to the SBA loan.
Can I buy a business with only seller financing?
Sometimes, especially for smaller businesses or when the seller wants a steady income stream. The terms are whatever you and the seller agree. Make sure the payments fit the cash flow, and have an attorney document the security and default terms.
Why would a seller agree to finance part of the price?
To get a deal done at a price the bank financing alone won't support, to earn interest on the proceeds, or to show confidence in the business. A seller who stays financially invested also has a reason to help the transition succeed.
Tell us what you're trying to do
No pressure, and we don't pull your credit to start. Describe your plan in your own words and we'll give you an honest read on what fits, what doesn't, and what your other options are — including ones that aren't an SBA loan.
General information, not legal, tax or financial advice. Precise SBA is not affiliated with the U.S. Small Business Administration. SBA rules and lender policies change; all financing is subject to lender underwriting and SBA program rules, and nothing here is an offer or commitment to lend. Examples use hypothetical numbers. We never charge you. If a loan closes, the lender may pay us a referral fee, disclosed on SBA Form 159 (how we get paid).