How to Get a Loan to Buy a Business

Why business acquisition loans are different from startup loans

Banks are cautious about startup businesses because there is no revenue history to underwrite. Acquisition loans are different — you are buying a business with proven cash flow, existing customers, and a track record. Lenders can look at three years of tax returns and decide whether the business generates enough income to service the debt. That makes acquisition financing significantly more accessible than startup financing, even for first-time buyers.

The catch: lenders are buying the same risk you are. If the business underperforms post-acquisition, the loan still needs to be paid. Your down payment — typically 10–20% — is the lender's first line of protection. The business's cash flow is the second. Your personal credit and collateral are the third.

SBA 7(a) loans: the most common path for deals under $5M

The Small Business Administration's 7(a) program is the dominant financing vehicle for business acquisitions in the US. The SBA does not lend directly — it guarantees up to 85% of the loan, which reduces the lender's risk and allows them to offer longer terms and lower down payments than conventional loans.

Key terms for 2026: — Maximum loan amount: $5 million — Down payment: 10% for full-documentation deals (cash injection from buyer) — Term: up to 10 years for working capital; up to 25 years for real estate — Interest rate: prime + 2.75% to 4.75% (variable), or fixed rates available through some lenders — Guarantee fee: 2–3.5% of the guaranteed portion, paid at closing

To qualify, you need a credit score above 680 (720+ improves your rate), two years of relevant industry or management experience, and a business with at least two years of tax returns showing debt service coverage of 1.25x or higher. That means the business earns $1.25 for every $1.00 of annual loan payment.

Seller financing: when the seller becomes the bank

In 10–30% of small business sales, the seller agrees to finance part of the purchase price. Instead of receiving the full amount at closing, they accept monthly payments over 3–7 years at a negotiated interest rate (typically 6–8%).

Why sellers agree: they get a higher sale price, steady income, and a tax advantage (installment sale treatment spreads the capital gains over multiple years). Why buyers want it: it signals the seller believes in the business's future cash flow, and it reduces the amount you need to borrow from a bank.

Seller financing rarely covers more than 30% of the purchase price. Most deals combine it with an SBA 7(a) loan: the bank covers 70–80%, the seller carries 10–20%, and the buyer puts in 10% cash. This structure is called a "seller note" and SBA lenders allow it on standby (no payments to the seller for the first 2 years of the loan).

ROBS: using retirement funds without paying the early withdrawal penalty

Rollover for Business Startups (ROBS) is a legal structure that lets you invest retirement funds — 401(k), IRA, 403(b) — into a business you own without triggering the 10% early withdrawal penalty or income tax.

How it works: you form a C-corporation, the corporation creates a new 401(k) plan, and you roll your existing retirement funds into the new plan. The plan then buys stock in your corporation, and the corporation uses those funds to purchase the business.

ROBS is not a loan — you are investing your own retirement assets. There is no debt service, no interest, and no personal guarantee. The downside: if the business fails, those retirement funds are gone. Setup costs $5,000–$10,000 through a ROBS provider and requires ongoing compliance (annual filings, plan administration). The IRS audits ROBS structures more closely than standard transactions, so using a reputable provider is mandatory.

Conventional bank loans: harder to get, faster to close

Conventional business loans from banks and credit unions do not carry an SBA guarantee. Because the lender bears 100% of the risk, requirements are stricter: typically 20–30% down payment, credit score above 700, and collateral covering at least 80% of the loan value.

The advantage is speed. Without SBA approval processes, conventional loans can close in 30–45 days versus 60–90 for SBA. For deals where the seller is motivated or there is a competing buyer, this matters.

Conventional loans also work for deals the SBA will not touch: businesses in certain industries (real estate investment, gambling, certain financial services), deals where the buyer already owns several SBA loans, or acquisitions above $5 million.

Community Development Financial Institutions (CDFIs) are a subset worth knowing: nonprofit lenders with a mission to serve underserved markets. They offer lower rates and more flexible terms than conventional banks, particularly for immigrant buyers, women, and veterans.

What lenders actually look at (and what kills deals)

Every lender runs the same basic analysis. Debt Service Coverage Ratio (DSCR) is the most important number: annual net operating income divided by annual debt payments. Most lenders require 1.25x minimum; 1.5x or higher gets you better rates.

Deals that die in underwriting: — Declining revenue over the last 2–3 years (even if profits are fine) — Owner's salary that disappears post-sale (if the owner was also the key employee) — Lease that expires within 2 years of closing with no renewal option — Environmental issues on the property — High customer concentration (one customer represents more than 25% of revenue)

The lease issue kills more deals than most buyers expect. If you are buying a business that depends on a physical location, confirm the lease has at least 5 years remaining or a long-term renewal option before spending money on due diligence.

Realistic down payment requirements by loan type

Here is what you actually need in cash at closing:

— SBA 7(a), full documentation: 10% of purchase price — SBA 7(a), limited documentation (deals under $500K): 10–15% — Conventional bank loan: 20–30% — Seller financing only: negotiated, often 10–20% cash at closing — ROBS: whatever your retirement account holds (no cash required from outside sources) — Equipment financing: 10–20% (works for asset-heavy businesses)

On a $500,000 business acquisition: SBA requires $50,000 cash. Conventional requires $100,000–$150,000. Those numbers do not include closing costs (2–5% of loan value), working capital reserve (3–6 months of operating expenses), and any required renovations or deposits.

Budget for total cash requirements of 20–25% of the purchase price when you factor everything in, even on an SBA deal.

The difference between buying a franchise and buying an independent business

Franchise acquisitions and independent business acquisitions use the same loan products, but franchises have one major advantage: the SBA maintains a Franchise Registry. If the brand is on the registry, lenders skip the review of the franchise agreement and move faster. Non-registered franchises require additional underwriting.

For franchise resales specifically: the SBA and most lenders require a transfer approval from the franchisor. This adds 30–60 days to the timeline. Budget for it.

Franchise acquisitions also come with a territory score question independent deals do not: is this location worth what the seller is asking? A franchise resale at $400,000 in a trade area with a location score of 4/10 is a different risk than the same price in a location scoring 8/10. The location score and the business price need to be evaluated together.

Frequently Asked Questions