When buying or selling a business, financing is often one of the most important parts of the deal. In many lower middle market transactions, Small Business Administration (SBA) loans play a central role. These loans help buyers access the capital they need while making businesses more marketable to potential acquirers.
What is an SBA Loan?
SBA loans are issued by banks and other approved lenders but are guaranteed in part by the federal government. This guarantee reduces lender risk and opens the door for more borrowers to qualify. The most common programs for acquisitions are:
• SBA 7(a) loan: The most flexible option, often used for business purchases, working capital, refinancing, and partner buyouts.
• SBA 504 loan: Typically focused on fixed assets such as real estate or large equipment.
Both programs are designed to support small and mid-sized businesses, and they can be an attractive alternative to conventional loans.
Key Terms to Know
SBA loans typically allow up to $5 million in financing, with buyers contributing about 10 percent of the purchase price. Repayment terms range up to 25 years for real estate and 10 years for working capital or equipment. Lenders usually require collateral and personal guarantees, and an appraisal may be needed when goodwill is a significant part of the price. Understanding these terms helps both buyers and sellers plan and close deals smoothly.
How Buyers Can Prepare
Buyers should come to the table with:
• Organized financial records and strong personal credit.
• A clear business plan that demonstrates how the business will succeed under new ownership.
• Relevant industry or management experience.
• Proof of equity contribution to meet the down payment requirement.
Working with a lender experienced in SBA transactions can make the process smoother and improve the chances of approval.
How Sellers Benefit
SBA financing is often a win for sellers as well. It expands the pool of qualified buyers and increases the likelihood of receiving competitive offers. Buyers who can secure SBA financing are often in a stronger position to close, since the terms are designed to make transactions more affordable.
Sellers should ensure their financial statements are clean, accurate, and ready for lender review. In some cases, SBA rules allow for seller involvement after closing, such as consulting during a transition period, which can further reassure buyers and help deals move forward.
The Bottom Line
SBA loans provide accessible financing for buyers and make businesses more attractive to sell. For both sides, preparation is key: clean financials, strong records, and realistic expectations. With the right planning and the right advisors, SBA financing can be the bridge that gets deals done in the lower middle market.
Jason Sanders | Managing Partner
517 206 7464