How SBA 7(a) loans work for acquisitions

The Small Business Administration does not usually lend the money itself. It guarantees part of a loan made by an approved lender. This overview focuses on initial acquisitions under SBA Standard Operating Procedure 50 10 8.1 with Technical Updates, effective October 1, 2026, particularly Appendix 15. Business expansions, owner buyouts, ESOPs and real-estate transactions have different provisions. Have your lender confirm the transaction category, current rules and any additional requirements before committing.

The headline terms

The 10% equity injection

Under SOP 50 10 8.1, an initial acquisition requires at least 10% of total project cost. Total project cost is not just the price. It includes closing costs, fees and financed working capital, with exclusions such as lines of credit and 504 loans. In a simple $600,000 purchase with $60,000 of costs and working capital, the minimum injection is $66,000.

Cash is the simplest source. A qualifying seller note can count toward the injection if it is subordinated and on full standby for the entire term of the SBA loan, meaning no principal or interest payments. Limited equity sources, including seller debt, together can cover no more than half of the required injection. The calculator assumes no other limited sources and caps counted seller debt at 5% of project cost. See Seller notes and standby.

Why coverage matters most

The lender's central question is whether the business's cash flow can pay the new debt. Appendix 15 defines historical coverage using EBITDA divided by combined post-transaction debt service, with documented adjustments where allowed. The requirement uses the last fiscal year or the average of the last two fiscal years. Arcane's coverage estimate uses a simpler SDE-minus-compensation-and-reserves model, not the lender's full underwriting calculation. In that model, $180,000 of SDE less $70,000 of compensation leaves $110,000 before any reserve. At 1.25× coverage, that supports about $88,000 a year of debt payments.

That limit flows straight back to price. At a 10-year term and an interest rate around 10.5%, $88,000 a year supports a loan of roughly $540,000. Add the buyer's injection, and you have an approximate ceiling on what a lender will finance, regardless of the asking price. The SBA loan calculator does this arithmetic.

Rates

7(a) loans are usually variable, priced as a spread over the prime rate. The SBA caps the maximum spread by loan size. Rates move, so model a rate two or three points higher than today's to see whether the deal still covers.

What the lender will ask for

• Three years of business tax returns and a year-to-date profit and loss statement
• The purchase agreement or letter of intent
• Your personal financial statement, tax returns and resume
• A business plan with projections
• An independent business valuation, required by SBA rules for many acquisition loans
• A quality-of-earnings report for initial acquisitions and business expansions with a purchase price of $3 million or more, subject to the SOP's special-purpose-property provisions
• Evidence of your equity injection and its source

Common surprises

• The appraisal comes in low. If the valuation does not support the price, the loan amount usually falls, and the gap has to come from the buyer or the seller.
• Working capital was forgotten. A business needs cash to operate from the first day. Financing it raises the project cost and the injection.
• The seller wants payments on the note. If the note is counting toward the injection, it cannot be paid during the loan term. Other seller notes can be paid, if the lender agrees.

Sources: U.S. Small Business Administration, 7(a) loans and SOP 50 10 8.1 with Technical Updates, Appendix 15, Sections B and C. This overview is educational, not an eligibility determination or lending advice.

Keep reading

• SBA acquisition loan calculator
• Seller notes and full standby
• Debt service coverage ratio (DSCR)