What an SBA 7(a) loan can pay for in a purchase
A seller note on full standby can cover no more than half of that equity, and the business's cash flow must cover the loan payments at least 1.25 times [1]. The SBA lists changes of ownership, complete or partial, as an eligible use of 7(a) loans [2]. In a purchase, the loan can also include working capital, your out-of-pocket costs such as the business valuation, and owner-occupied real estate when it is structured with a blended term [1]. Goodwill, customer lists and other intangibles can be financed, as long as the valuation rules are met [1].
A 504 loan is different: it can finance a building or long-lived equipment that comes with the purchase, but not the business itself, since 504 money cannot pay for working capital or inventory [3]. If real estate is part of the deal, you can split it into a separate loan.
A 7(a) loan cannot be made to you alone. The business must be the borrower or a co-borrower; when an individual buys 100% of a company, the person and the company sign the note together [1].
The down payment: 10%, and where it can come from
For an initial acquisition, which is the default category when a new owner buys a business, the minimum equity injection is 10% of the total project cost, and it cannot be reduced or eliminated [1]. Total project cost means all costs required to complete the purchase, whatever the source of funds, except lines of credit and 504 loans [1].
| Source | How much it can cover |
|---|---|
| Your own cash that is not borrowed, including a gift | No limit |
| A personal loan to a guarantor repaid from outside the business | No limit |
| Grants with no repayment or clawback terms | No limit |
| Verified prepaid expenses for the deal, including the valuation and quality of earnings report | No limit |
| Seller note subordinated and on full standby | Together with other limited sources, no more than half of the required equity |
| Investors owning less than 20% with no control | Counted within the same half |
Full standby means the seller receives no principal or interest payments for the entire term of the SBA loan [1]. Interest can accrue and be paid after the SBA loan is gone [1]. A seller note that is not on standby still counts toward the deal's total debt, which is capped at the business valuation [1].
Different purchase types have different flexibility. When an existing business that has operated for at least two full fiscal years buys another business in the same industry group, the lender may reduce or waive the 10% if the buyer has enough liquidity [1].
Valuation and quality of earnings: proving the price
Every SBA purchase needs a business valuation, and the lender must order it, not you or the seller [1]. It must come from an accredited valuation professional, such as an Accredited in Business Valuation (ABV) holder or a Certified Valuation Analyst (CVA) [1]. If the business purchase price is $350,000 or less, the lender may do its own valuation, unless the buyer and seller have a close relationship [1].
If the price is higher than the valuation, you pay the difference in equity [1]. That is the rule that sinks most overpriced deals, so get a sense of value before you sign a letter of intent.
Bigger purchases need more proof. When the purchase price is $3 million or more on an initial acquisition or a business expansion, the lender must also get a quality of earnings report, and must use its earnings figure to test whether the business can carry the debt [1]. The lender must also check the seller's financials against IRS tax transcripts [1].
The cash flow test: debt service coverage
The business you buy has to earn enough to pay for itself. SBA rules set a minimum debt service coverage ratio for each kind of purchase, measured on the last fiscal year or the average of the last two [1]:
| Purchase type | Minimum coverage | Plain meaning |
|---|---|---|
| Initial acquisition (new owner) | 1.25 to 1 | $1.25 of cash flow for every $1 of loan payments |
| Business expansion (existing business buys a peer) | 1.15 to 1 | $1.15 for every $1 |
| Owner buyout | 1.25 to 1 | $1.25 for every $1 |
| Employee stock ownership plan or cooperative | 1.25 to 1 | $1.25 for every $1 |
A worked example: buying a $1 million business
Say you are buying a business for $1,000,000, with no real estate, and that is the total project cost. Here is how the rules stack up, using today's maximum 7(a) rate. Your actual rate may be lower.
| Item | Amount |
|---|---|
| Your equity, at least 10% | $100,000 |
| Of which a full-standby seller note can cover at most | $50,000 |
| SBA 7(a) loan | $900,000 |
| Maximum variable rate today | 10.0% |
| Monthly payment over 10 years | $11,893.57 |
| Yearly loan payments | $142,722.80 |
| Cash flow the business needs at 1.25 coverage | $178,403.49 a year |
| Maximum SBA upfront fee (3.5% of the $675,000 SBA-backed portion) | $23,625 |
The upfront fee is the SBA's maximum for a loan this size; the lender may pass it to you, and the SBA can set lower fees for a fiscal year by notice [1]. The SBA backs 75% of a loan above $150,000 [5], which is where the $675,000 comes from.
If the business earned less than about $178,000 a year in cash flow, the loan would have to shrink and your equity grow to make the deal work.
Smaller deals, faster programs, and buying in New Jersey
A small purchase does not have to go through the full standard 7(a) process. The SBA allows 7(a) Small loans, up to $350,000, and SBA Express loans, up to $500,000, to fund a change of ownership, subject to the same Appendix 15 rules [1]. The main relief: when the business purchase price is $350,000 or less, the lender may value the business itself instead of ordering an outside valuation [1]. The coverage test does not loosen for these programs [1].
SBA purchase rules are federal, so a deal in Bergen County follows the same equity, valuation and coverage rules as one anywhere else. New Jersey borrowers use the 7(a) program heavily: they took 2,831 7(a) loans in federal fiscal year 2025, at a median of $150,000 [6]. The SBA's New Jersey District Office in Newark serves all 21 counties and can connect you with lenders and free counseling [7].
The seller's role, terms and the rules people miss
- The seller in a full purchase cannot stay as an owner, officer or employee. The business may hire the seller as a consultant for up to 24 months in total [1].
- Seller earnouts are prohibited. Buyer rebates tied to performance are allowed, and the rebate must pay down the loan [1].
- The business portion has a 10-year term. Real estate can stretch to 25 years, either as a separate loan or blended by use of proceeds [1].
- A seller note can be refinanced only after it has been in place and current for 36 months [1].
- Your lender must do a site visit to the business you are buying [1].
- All buying owners must meet the 2026 citizenship and residency rule [1]. See SBA loan requirements.
Business Funders is not affiliated with the SBA. Our quiz shows whether an SBA purchase loan fits your numbers and what it would cost, so you know before you bid.