Most business purchases are financed through some combination of an SBA-backed loan, seller financing, and the buyer’s own cash. The right mix depends on the size of the deal, the strength of the business you’re buying, and how much capital you can bring to the table. Here’s how each financing method works and what to expect from the process.
SBA 7(a) Loans
The SBA 7(a) program is the most common way people finance small business acquisitions. A bank makes the loan, and the SBA guarantees a portion of it, which makes lenders more willing to approve deals they’d otherwise pass on. Buyers typically put down about 10% of the purchase price as an equity injection, meaning your own cash in the deal.
SBA 7(a) loans can go up to $5 million, with repayment terms of up to 10 years for a business acquisition (or 25 years if the deal includes commercial real estate). Interest rates are variable, tied to the prime rate plus a spread that depends on the loan size and term. These loans require the business to show enough cash flow to cover debt payments, and the lender will want to see tax returns, profit-and-loss statements, and a solid business plan explaining how you’ll run the company after the purchase.
The process takes anywhere from 45 to 90 days from application to funding, sometimes longer. You’ll also pay a guarantee fee to the SBA, which scales with the loan amount. For a $500,000 loan, expect the fee to be a few thousand dollars, rolled into the loan balance. The upside is favorable terms: lower down payments than conventional loans, longer repayment periods, and rates that are reasonable for acquisition financing.
Seller Financing
Seller financing means the person selling the business agrees to let you pay part of the purchase price over time, essentially acting as your lender. This is extremely common in small business deals, either as the primary financing method or as a supplement alongside an SBA loan.
In a typical arrangement, you might pay 50% to 70% of the price at closing (from your own funds, a bank loan, or both) and owe the seller the remaining balance over three to seven years. Interest rates on seller-financed portions tend to run higher than bank loans, reflecting the risk the seller is taking. Balloon payments are also common, where you make smaller monthly installments for a set period and then owe the entire remaining balance in one lump sum at the end.
Seller financing benefits both sides. You get into the deal with less upfront cash, and the seller gets a higher total price (because of interest) while spreading out their tax liability on the gain. Many SBA lenders actually like to see the seller carry a note for 10% to 20% of the deal, because it signals the seller has confidence the business will keep performing. When negotiating seller financing, pay attention to the interest rate, the length of the payment period, whether there’s a balloon payment, and what happens if you default. Get everything documented in a formal promissory note.
Conventional Bank Loans
Some buyers finance acquisitions through conventional commercial loans without SBA backing. These loans are harder to qualify for because the bank takes on all the risk. Expect to put down 20% to 30% of the purchase price, and the bank will scrutinize the target business’s financials heavily.
Conventional loans can close faster than SBA loans since there’s no government guarantee process to work through. They also avoid SBA guarantee fees. But the trade-off is stricter qualification standards: strong personal credit (usually 700 or above), significant collateral, and a business with clean, consistent cash flow. If the business you’re buying has solid financials and you have substantial assets, a conventional loan might offer a faster, simpler path. For most first-time buyers, though, SBA loans are more accessible.
Asset-Based Lending
If the business you’re buying has valuable assets on its balance sheet, asset-based lending lets you borrow against those assets to fund part of the purchase. Lenders will typically advance up to 85% of the value of accounts receivable (money the business is owed by its customers) and up to 60% of inventory value.
This type of financing works best for businesses with predictable receivables or large inventory holdings, like manufacturing companies, distributors, or staffing firms. The lender evaluates the quality of the collateral more than your personal creditworthiness, which can help buyers who have a strong target business but limited personal assets. The downside is that asset-based loans usually carry higher interest rates than traditional term loans, and the lender will monitor the collateral closely, often requiring monthly or even weekly reporting on receivables and inventory levels.
Using Retirement Funds (ROBS)
A Rollover as Business Startup, known as ROBS, lets you use money from a 401(k) or other qualified retirement account to buy a business without paying early withdrawal penalties or income tax on the rollover. The mechanics work like this: you create a new C corporation, establish a retirement plan under that corporation, roll your existing retirement funds into the new plan, and then the plan uses those funds to purchase stock in your new corporation. The corporation then uses that capital to buy the business.
ROBS is legal, but the IRS watches these arrangements closely. The structure is complex and has several ongoing compliance requirements. You must file Form 5500 annually, even if you’re the only employee. If you hire additional employees, the retirement plan must be open to them on a nondiscriminatory basis. You can’t amend the plan after setup to exclude other workers from participating, as this can violate qualification requirements and trigger disqualification of the entire plan. A disqualified plan can result in the full rollover amount being treated as a taxable distribution, plus a 10% early withdrawal penalty if you’re under 59½.
ROBS arrangements also come with recurring fees from the companies that set them up and maintain them, sometimes called promoter fees. The IRS has noted that large recurring promoter fees have been a factor in some ROBS business failures. If you go this route, budget for ongoing administration costs of roughly $100 to $150 per month, plus setup fees that can run $5,000 or more. ROBS can be a useful tool for buyers who have substantial retirement savings but limited liquid cash, but the compliance burden is real.
Search Funds and Equity Partners
If you don’t have the capital to buy a business on your own, bringing in equity investors is another path. A search fund is a formal version of this: an entrepreneur raises a small amount of money from investors to fund a search for a business to acquire, then raises additional equity from those same investors (or new ones) to close the deal.
In the traditional search fund model, the entrepreneur (called the “searcher”) earns a percentage of equity based on closing the deal, with additional equity vesting over time and tied to hitting return targets. The investor group, typically 10 to 20 people, helps with due diligence and has the option to invest equity in the actual acquisition.
Self-funded searchers take a different approach. They finance the search phase out of their own pocket, which means no salary during the search period but the potential to own up to 100% of the company’s equity. Many self-funded searchers structure deals using a combination of bank debt, seller financing, and a small amount of personal equity, sometimes needing no outside capital at all.
Other models exist as well. Some accelerators and single sponsors provide 100% of the equity needed for an acquisition, with the entrepreneur earning a significant share of ownership based on the performance of the business after the purchase. In these arrangements, the operator’s equity compensation is entirely performance-based, with materially more upside if the business hits prescribed growth targets. If operators grow their businesses fast enough, they can earn majority ownership over time.
Putting Together Your Financing Stack
Most business acquisitions don’t rely on a single source of financing. A common structure for a small business purchase looks something like this: 10% from the buyer’s personal funds, 10% to 20% from a seller note, and 70% to 80% from an SBA loan. For larger deals, you might replace the SBA loan with a conventional loan or bring in equity partners to cover the down payment.
Before approaching any lender, get the target business’s financials in order. You’ll need at least three years of tax returns, profit-and-loss statements, a balance sheet, and ideally a quality of earnings report prepared by an accountant. Lenders want to see that the business generates enough cash flow to cover the debt payments comfortably, typically at a ratio of at least 1.25 to 1, meaning the business produces $1.25 in cash flow for every $1 in annual debt service.
Your personal financial picture matters too. Lenders look at your credit score, net worth, liquidity, and relevant experience in the industry. Having management experience in the same sector as the business you’re buying significantly strengthens your application. If you’re short on experience, partnering with someone who has it, or structuring a transition period where the seller stays on for six to twelve months, can help get the deal approved.