An acquisition is funded by a stack, not a loan
One lender rarely funds the whole purchase. A typical small business acquisition is assembled from three or four sources, each with different cost, different security, and a different position if things go wrong. Your job is to build a stack that closes and that the business can actually carry.
| Source | Share | Amount on a $2M deal |
|---|---|---|
| SBA 7(a) loan | 75% | $1,500,000 |
| Seller note | 15% | $300,000 |
| Your cash | 10% | $200,000 |
The buyer's own cash is the smallest piece and the one under the most pressure: it has to cover the injection and closing costs and leave working capital in the business afterwards. Buyers who calculate only the injection arrive at closing short.
The deal is not funded when the numbers add up. It is funded when the business can service what you borrowed to buy it.
Which loan actually fits your deal
The decisive question is usually not rate. It is what the lender will fund. When you buy a going concern, most of the purchase price is goodwill — the value above hard assets. That single fact eliminates several options before cost is discussed.
| program | Funds goodwill? | Injection | Term |
|---|---|---|---|
| SBA 7(a) | Yes | 10% minimum | 10 yr, 25 with real estate |
| SBA 504 | No | 10 / 15 / 20% | 10 / 20 / 25 yr |
| Conventional | Rarely | 20–30% typical | 5–10 yr, often balloon |
| Seller note | n/a — fills the gap | 10–30% of price | 3–7 yr |
- 7(a) for — funds goodwill, working capital and inventory; long amortization; lower equity requirement.
- 7(a) against — upfront guaranty fee on the guaranteed portion, an annual fee for the life of the loan, a personal guarantee and usually a lien on your home.
- 504 for — fixed rate on the debenture, often the lowest all-in cost where the project qualifies.
- 504 against — cannot fund goodwill, inventory or working capital; two lenders, two closings.
- Conventional for — fastest to close, no guaranty fees, no eligibility review.
- Conventional against — substantially more equity, rarely finances goodwill, balloon at maturity.
If you are buying a business that owns its building, a 504 may fund the property while a 7(a) funds the rest. If you are buying a services business whose assets are relationships and a client list, 504 is simply unavailable and conventional lenders will mostly decline. That is why 7(a) dominates this market.
What a lender is actually testing
Credit committees are not evaluating whether the business is good. They are evaluating whether it generates enough cash to repay the loan with room to spare, and what they recover if it does not.
| Test | What it asks | Typical floor |
|---|---|---|
| Debt service coverage | Cash flow ÷ annual debt service | 1.25x |
| Equity injection | How much of your money is at risk | 10% |
| Collateral coverage | Liquidation value of the assets | Varies |
| Global cash flow | Business plus your personal obligations | 1.0x+ |
DSCR sets your maximum purchase price. If the business throws off $300,000 of adjusted cash flow, the most debt service it can support is $240,000 a year, which at typical terms caps the loan around $1.7M to $1.9M. You can pay more only by putting in more of your own money, not by borrowing more.
Lenders look at your personal obligations too — mortgage, car loans, other businesses — alongside the acquisition debt. A deal that works on the business's numbers can fail on global coverage if the buyer is carrying significant personal debt. Worth calculating before you spend money on diligence.
The seller note does more than fill a gap
Most acquisitions include seller financing, typically ten to thirty percent over three to seven years. It closes the arithmetic gap between what the bank will lend and what you have. Its more useful function is informational.
A seller who will carry a note is betting on the business performing after they leave. A seller who insists on all cash may have good reasons — estate planning, a divorce, another purchase — or may know something. It is worth asking directly and noticing how the answer lands.
Where an SBA loan is involved the seller note is often required on full standby — no payments at all, sometimes for two years or the life of the SBA loan. On full standby the note may count toward your equity injection, which can be the difference between a deal that funds and one that does not. The seller receives nothing during that period while interest may still accrue.
Your injection is more than the down payment
| Item | On a $2,000,000 acquisition | Amount |
|---|---|---|
| Equity injection | 10% of project cost | $200,000 |
| Closing costs | Legal, search, filing, appraisal | $25,000 |
| Due diligence | Quality of earnings, legal review | $20,000 |
| Working capital | Payroll and suppliers from day one | $60,000 |
| Realistic cash required | Before any surprises | $305,000 |
The working capital line is most often forgotten. You take over a business on a Monday and payroll runs on Friday, funded by receivables you have not collected yet. Some lenders will include working capital in the loan; many will not fund all of it, and none will fund your closing costs.
Personal savings, a retirement rollover structure, a gift with a signed letter, or in some cases a seller note on full standby. Borrowed funds generally do not count unless repayment is not required from business cash flow. Lenders trace the source, so a sudden deposit shortly before closing invites questions you would rather not spend the last week answering.
What the process actually looks like
Pre-qualification
An honest conversation with a lender about deal size, your injection and your background. Free, fast, and it prevents months of wasted effort.
Letter of intent
Price, structure, seller note terms, transition, exclusivity. Not binding on price, but it sets the frame everything works within.
Diligence
Financial, legal and operational. Where a quality of earnings analysis pays for itself, and where most renegotiation happens.
Loan application
Three years of business and personal returns, the plan, your resume, a personal financial statement. Assemble it once, properly.
Underwriting
Credit committee, appraisal, valuation where required. Questions come in waves; answer each within a day.
Commitment and closing
Conditions cleared, documents drawn, funds disbursed. Working capital in place before day one.
The single highest-value thing you can do is start with pre-qualification. Knowing your realistic ceiling before you fall in love with a business saves months, and it changes how you negotiate.
Where these deals die
- Add-backs that do not survive — the price was agreed on the seller's adjusted earnings, the lender removes a third of them, and the DSCR no longer works. Test them before signing an LOI.
- Customer concentration found late — a single customer at forty percent changes the lender's view entirely, and it is usually discovered rather than disclosed.
- Working capital not funded — the loan covers the purchase and nothing else, and the business is starved from month one.
- Landlord will not assign the lease — or will, on much worse terms. Entirely checkable in advance.
- Seller will not stay — lenders want a transition period. A seller planning to hand over the keys is a credit issue as well as an operational one.
- Buyer's personal credit — a personal guarantee is required, so your own history and obligations are underwritten alongside the business.
Most failed acquisitions did not fail at underwriting. They failed at diligence, when something true turned out to be different from what was represented.