How to Finance a Business Acquisition: SBA Loans, Seller Financing, and Beyond
How you finance a business acquisition affects much more than your interest rate. It determines how much cash you need upfront, how quickly you can close, how the deal can be structured, and what financial obligations you'll have after taking ownership.
Choosing the wrong financing option can be expensive. Whether it's approaching a lender that isn't a good fit, using a loan program that doesn't work for your acquisition, or taking on debt that creates problems after closing, financing mistakes can put an otherwise solid deal at risk.
Below, we'll cover the major financing options available to business buyers, how each one works, and what to consider when choosing the right approach.
SBA 7(a) Loans: A Popular Option for Acquisitions Under $5 Million
For many buyers acquiring a business for less than $5 million, an SBA 7(a) loan is the best place to start. It offers competitive rates, longer repayment terms, and lower down payment requirements than most conventional financing options.
How SBA 7(a) Financing Works
The Small Business Administration (SBA) guarantees 75% of loans above $150,000, allowing participating lenders to finance acquisitions with as little as 10% buyer equity.
Key terms include:
- Maximum loan amount: $5 million in SBA-guaranteed financing.
- Interest rates: Variable rates based on Prime plus a lender spread. For terms of seven years or longer, the maximum spread is Prime + 3.0%. Current rates generally range from 7.75% to 10.5%.
- Repayment terms: Typically 10 years for business acquisitions, with terms up to 25 years when real estate accounts for more than 50% of the loan proceeds.
- Equity injection: Generally a minimum of 10% of the total project cost.
How the Equity Injection Works
Buyers don't always have to provide the entire 10% equity injection in cash.
A qualifying seller note on full standby can satisfy up to 5% of the purchase price toward the equity requirement. Full standby means the seller receives no principal or interest payments for the life of the SBA loan.
This can allow a buyer to complete an acquisition with 5% cash and a 5% seller note on standby.
Other potential sources of equity include:
- Personal savings
- Home equity through a HELOC, provided the buyer has outside income to cover the payments
- Retirement funds through a ROBS structure
- Gift funds with the required documentation
Who Qualifies?
SBA financing is generally available to U.S. citizens and permanent residents who have relevant industry or management experience.
The business must be a for-profit operating company that meets SBA size standards. Under the standard program rules described here, the buyer must also acquire 100% ownership of the business.
How Long Does SBA Financing Take?
Most SBA acquisitions take approximately 60 to 90 days from the letter of intent (LOI) to closing when working with a Preferred Lender Program (PLP) lender.
Standard lenders may need an additional two to four weeks for SBA review. Working with an experienced PLP lender can help buyers stay on schedule.
Best for: U.S. buyers purchasing a business for under $5 million through a standard asset purchase, with a 60-to-90-day closing window.
For more details, see our Complete SBA 7(a) Acquisition Loan Guide.
Capital Access: Financing for Larger or More Complex Acquisitions
Not every acquisition qualifies for SBA financing. Some deals exceed SBA loan limits, involve foreign buyers, or require ownership and payment structures that SBA lenders cannot accommodate.
For these transactions, Capital Access financing may be an option.
How Capital Access Financing Works
Unlike SBA loans, Capital Access financing comes from private and institutional lenders rather than government-guaranteed lending programs.
Ecommerce Lending's Capital Access program serves transactions ranging from $10 million to $250 million.
Financing may come from:
- Direct lenders
- Private credit funds
- Family offices
Depending on the acquisition, financing structures may include first-lien term loans, unitranche debt, mezzanine financing, or equity co-investment.
A unitranche loan combines first- and second-lien debt into a single financing facility.
Rates and Equity Requirements
Capital Access financing typically carries higher interest rates than SBA loans.
Pricing is often based on SOFR plus 500 to 700 basis points, resulting in effective rates of approximately 9.5% to 12% or higher, depending on the transaction.
Buyers generally need at least 20% equity. However, the equity requirement can include seller financing and rollover equity, providing more flexibility than SBA's standby seller note requirements.
Why Buyers Consider Capital Access
The biggest advantage is flexibility.
Capital Access can accommodate:
- Earnouts
- Partial ownership acquisitions
- Seller rollover equity
- Foreign buyers
- More complex financing structures
- Transactions exceeding SBA loan limits
It may also allow buyers to close faster. Clean transactions can sometimes close within 30 to 45 days because there's no government pre-approval process.
Best for: Larger acquisitions, foreign buyers, complex deal structures, or buyers who need a faster closing and can accommodate a higher cost of capital.
Seller Financing: Using a Seller Note to Help Fund the Acquisition
Seller financing is commonly used alongside other acquisition financing rather than replacing it entirely.
With seller financing, the seller agrees to receive a portion of the purchase price over time instead of collecting the full amount at closing.
How the seller note is structured depends on the financing program and the terms of the deal.
Seller Financing With SBA Loans
For SBA-financed acquisitions, a qualifying seller note on full standby can count toward up to 5% of the buyer's required equity injection.
Because the seller receives no payments during the SBA loan term, the standby note doesn't add to the buyer's debt service calculation.
This is one way buyers can reduce their upfront cash requirement from 10% to 5%.
Sellers can also provide amortizing subordinated notes. These allow regular payments to the seller, but the debt is subordinate to the SBA loan and must be included in the debt service coverage ratio (DSCR) calculation.
For example, if a buyer has a $1.4 million SBA loan and a $200,000 amortizing seller note, the lender must account for payments on both loans.
Seller Financing With Capital Access
Seller financing is often more flexible in Capital Access transactions.
The required equity contribution of 20% or more may include a combination of seller notes, rollover equity, and institutional equity alongside senior debt.
Seller Financing for Distressed or Off-Market Deals
In some situations, motivated sellers may finance 20% to 40% of the purchase price, particularly when the business has characteristics that make traditional financing harder to obtain.
Fully seller-financed acquisitions, with no bank involved, are less common but do happen. They're most likely when the seller is highly motivated and the business has limited appeal to institutional lenders.
ROBS: Using Retirement Funds to Finance an Acquisition
Buyers with substantial retirement savings but limited cash may be able to use a Rollover for Business Startups (ROBS) structure to fund their equity injection.
ROBS allows buyers to use eligible pre-tax retirement funds, including 401(k) or IRA assets, without triggering the taxes and early withdrawal penalties that would normally apply.
How ROBS Works
The process involves several steps:
- The buyer forms a C-corporation.
- The corporation establishes a qualified retirement plan.
- The buyer rolls eligible retirement funds into the new corporate plan.
- The retirement plan uses those funds to purchase stock in the C-corporation.
- The corporation uses the invested funds as equity for the acquisition.
For example, a buyer with $300,000 in a 401(k) but limited liquid savings could use a ROBS structure to put those retirement funds toward buying a business.
Costs and Requirements
ROBS comes with setup costs and ongoing compliance responsibilities.
Typical costs include:
- Initial setup: $5,000 to $7,000 through a specialized administrator
- Annual compliance: $1,500 to $3,000
- Corporate structure: A C-corporation with an ongoing qualified retirement plan
Buyers also need to consider the risk. Instead of keeping their retirement savings in a diversified portfolio, they're investing those funds in the success of the acquired business.
Can ROBS Be Used With SBA Loans?
Yes. ROBS-funded equity can be used with SBA 7(a) acquisition financing.
This combination is particularly useful for buyers who have accumulated meaningful retirement savings but don't have enough liquid cash for the required equity injection.
Home Equity: Funding an Acquisition With a HELOC or Home Equity Loan
Homeowners may be able to use the equity in their property to help fund a business acquisition.
A home equity line of credit (HELOC) or home equity loan can provide some or all of the cash needed for the buyer's equity injection.
How It Works
The buyer borrows against their home's equity and uses those funds toward the acquisition.
For SBA financing, there's an important requirement: the buyer must have enough income outside the acquired business to repay the home equity debt.
SBA lenders verify that the buyer can cover both the HELOC payments and normal household expenses without relying on the acquired business's cash flow.
Who Is a Good Fit?
Home equity financing generally works best for buyers who have:
- Substantial equity in their home
- Stable income that will continue after the acquisition
- Limited liquid savings available for a down payment
It can be especially useful for dual-income households where one person's income can continue supporting household expenses and the home equity payments.
Buyers who will depend entirely on the acquired business for income after closing generally cannot use home equity for their SBA equity injection because they lack the outside income needed to service the debt.
How Long Does It Take?
HELOC origination typically takes 30 to 60 days.
Buyers considering this option should start early enough to have the funds available before the acquisition closes.
Conventional Bank Loans: An Alternative to SBA Financing
Traditional commercial bank loans can also be used to finance business acquisitions, although they're less common than SBA loans for smaller transactions.
Unlike SBA financing, conventional bank loans don't have a government guarantee. As a result, banks generally take a more conservative approach to underwriting.
Advantages of Conventional Financing
Conventional bank loans may offer:
- Lower interest rates than SBA loans
- No SBA guarantee fee
- More flexibility for certain acquisition structures
- No SBA-specific program requirements
Disadvantages
Banks tend to have stricter borrower and collateral requirements.
They often prefer businesses with substantial hard assets, such as commercial real estate or equipment, and may be less willing to finance acquisitions where much of the purchase price is attributable to goodwill.
Repayment terms are also typically shorter than SBA loan terms.
Who Should Consider Conventional Financing?
Conventional financing is generally better suited for buyers with strong personal balance sheets, established banking relationships, and acquisition targets with meaningful hard asset collateral.
It can also be useful after an SBA-financed acquisition.
Refinancing an SBA Loan After Closing
Once an acquired business has established three to five years of operating history, refinancing the original SBA loan into conventional bank debt may become an option.
Depending on the lender and the business's performance, refinancing can potentially provide:
- Lower interest rates
- Release of a personal guarantee
- Additional SBA borrowing capacity for a future acquisition
Private Equity and Search Funds: Acquiring With Outside Investors
Not every buyer wants to fund an acquisition entirely with their own money or traditional debt.
Outside equity investors can help finance an acquisition in exchange for an ownership stake in the business.
Two common approaches are self-funded searches and traditional search funds.
Self-Funded Search or Independent Sponsor
In this structure, the buyer identifies an acquisition target and then raises equity from investors to help finance the purchase.
The buyer typically contributes a smaller portion of the equity and may earn additional ownership through a management promote tied to the business's performance.
These arrangements involve more complicated ownership, governance, and financial terms.
They're generally better suited for experienced buyers with strong deal-sourcing capabilities.
Traditional Search Fund
With a traditional search fund, the buyer raises capital from investors before beginning the search for a business.
That capital supports both the search process and the eventual acquisition.
Investors typically receive 70% to 80% of the equity after closing, while the searcher earns a management ownership stake.
Traditional search funds follow a more formal structure and come with established investor expectations.
What Buyers Should Consider
Outside equity reduces the amount of personal capital a buyer needs, but it also means giving up ownership.
That can substantially change the financial outcome compared with a debt-financed acquisition where the buyer retains 100% ownership.
For most individual buyers acquiring businesses under $5 million, SBA financing with full ownership is generally more attractive than giving up a significant portion of the business to outside investors.
How to Choose the Right Acquisition Financing Option
The right financing structure depends on the size of the acquisition, the buyer's financial profile, the terms of the deal, and how quickly the transaction needs to close.
Here are the main factors to consider.
1. Purchase Price
Under $5 million: SBA 7(a) financing is generally the first option to explore for qualified buyers.
Above $5 million: Capital Access financing may be more appropriate, particularly for larger acquisitions that exceed SBA loan limits.
Between $3 million and $5 million: SBA financing may still work, although Capital Access could be an alternative depending on the buyer's profile and the transaction.
2. Buyer Citizenship
U.S. citizens and permanent residents: May qualify for SBA financing, provided they meet the program's other eligibility requirements.
Foreign nationals: Generally need to explore Capital Access or conventional bank financing.
3. Acquisition Structure
Standard asset purchase with 100% change of ownership: SBA financing is often a good fit.
Earnouts, partial acquisitions, or complex financing structures: Capital Access or conventional financing may offer more flexibility.
4. Closing Timeline
60 to 90 days: SBA financing through an experienced PLP lender is generally a practical option.
30 to 45 days: Capital Access may be better suited for a faster close. Certain PLP lenders with a strong track record of quick closings may also be an option.
5. Available Equity
Limited liquid savings but substantial retirement funds: ROBS may provide the equity needed for an SBA acquisition.
Substantial home equity and reliable outside income: A HELOC or home equity loan may help cover the required injection.
Strong liquid savings: A traditional SBA structure may be the simplest approach.
Finding the Right Financing for Your Acquisition
For most qualified buyers purchasing a business under $5 million, an SBA 7(a) loan through an experienced PLP lender is a strong starting point. It typically offers favorable leverage, competitive rates, and an established underwriting process.
But SBA financing isn't the right fit for every acquisition. Larger transactions, foreign buyers, and deals with more complicated ownership or payment structures may benefit from Capital Access or other financing arrangements.
The goal is to choose financing that works for both the acquisition and the business after closing.
At Ecommerce Lending, we help buyers evaluate their financing options and connect with lenders that fit their acquisition goals.
Start with a prequalification to find out which financing options may be available for your deal.