SBA financing — how most small-business deals get funded
Roughly two-thirds of small business acquisitions under $5M run through SBA 7(a) financing. If your buyer is using SBA, the underwriter's rules effectively become your deal terms. Here's what to know going in.
Why sellers should care about SBA rules
You're not the borrower — but if your buyer's SBA loan dies in underwriting, your deal dies with it. Knowing the rules up front lets you structure the deal to clear underwriting on the first try.
What SBA 7(a) covers
- Up to $5M loan size
- Up to 10-year term for goodwill / business acquisition
- Up to 25-year term for real estate
- Variable rate, currently in the 10-11.5% range
- SBA guaranty reduces lender risk; you still owe the lender
Key changes — SOP 50 10 8 (June 2025)
The SBA's Standard Operating Procedure governs how lenders underwrite. The current version (SOP 50 10 8) tightened several rules:
- 10% equity injection minimum. Buyer must put 10% of the project cost in cash (or qualifying equity).
- Seller note can count as equity— but only if it's on full standby (no payments) for the life of the loan.
- Earnouts are prohibited on most acquisition deals. Performance-based seller notes are the workaround.
- Personal guaranty required from anyone with 20%+ ownership.
Common mistake — promising an earnout in an SBA deal
SOP 50 10 8 prohibits earnouts on most acquisition deals. If your LOI calls for an earnout, the SBA loan stops. Use a performance-based seller note instead, structured to the lender's standby rules.
How the deal stack typically works
For a $1M business sale:
- $100K equity injection from buyer (10%, can be a mix of buyer cash + standby seller note)
- $800-900K SBA 7(a) loan at 10-11.5% over 10 years
- $50-100K optional second seller note with payment terms layered on top
What the underwriter looks at
SBA underwriting is anchored to trailing historical cash flow — not projections, not backlog, not future contracts. They want a 1.25x debt service coverage ratio (DSCR) on a trailing 12-month basis. If your business doesn't cover the new debt 1.25x from historical cash flow alone, the loan won't approve.
What underwriters actually pull
The lender pulls your last 3 years of tax returns first — not your QuickBooks P&L. If those don't support 1.25x DSCR after the new debt service, the loan doesn't fund. Clean books that match your taxes are the price of admission.
Operational signals that block SBA approval
Five specific things that kill SBA deals at underwriting:
- Books that don't match tax returns. First thing the lender asks for. Mismatch = no loan.
- One customer above 25-30% concentration. Underwriter sees customer-loss as default risk.
- Owner-only licenses or technical skills.If the business can't legally operate without you, the buyer can't take over.
- Lease shorter than the loan term. If the lease ends in 5 years and the loan is 10 years, the lender needs comfort that the business can move or renew.
- Unverifiable add-backs.“I take a lot of cash” doesn't add back. Documented owner perks do.
Pro tip — fix these before listing
The 5 SBA-killers above are mostly fixable in 60-180 days: clean up the bookkeeping, diversify the top customer, cross-train the licensed work, extend the lease, and document add-backs with paper trails. Every fix widens your buyer pool and your sale price.
Seller note basics
A seller note is the seller carrying part of the purchase price as a loan. The size and terms are completely deal-dependent— there's no one-size-fits-all.
- SBA deals: commonly 5-10% of price on full standby (counts as equity), with an optional second note 5-10% with payments.
- Non-SBA deals: seller notes can run from 10% to 50%+ of price, depending on buyer credit, asset base, lease situation, and how clean the financials are.
- Interest rate: typically 6-10% in current market (Guidant 2025 data).
- Term: 3-7 year amortization is most common.
How a specialist broker helps with financing
A specialist broker has lender relationships in your industry and your area. They know which SBA preferred lenders (PLP) underwrite HVAC vs. restaurants vs. self-storage — and which ones won't. They'll structure the deal to fit underwriting before they take it to lenders, instead of getting back declined applications.
Sources: SBA SOP 50 10 8, Whiteford 2025 client alert, sba504blog, Guidant Financial.
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