Why Structure Matters More Than Price
Most first-time buyers fixate on purchase price, but a $2M deal with poor loan structure can bankrupt you faster than a $3M deal with disciplined financing. The difference isn't abstract—it shows up in your cash-sweep obligations, personal-guarantee exposure, and whether you sleep through the first winter.
SBA 7(a) loans finance a significant portion of sub-$5M acquisitions because they offer what private lenders won't: 10-year terms, no balloon payments, and non-recourse restrictions that keep banks from liquidating assets on day one. But lenders don't hand out favorable terms for free. They engineer structures that shift risk back to you while staying inside SBA guidelines.
This article deconstructs those structures. You'll learn how lenders calculate debt-service coverage, why seller notes sit subordinate, and which deal features trigger automatic declines. If you're evaluating a live acquisition today, treat this as your pre-flight checklist.
TL;DR
SBA 7(a) loan terms: 10-year terms, Prime + 2.75% cap (9.75% max as of Oct 2025), full amortization, unlimited personal guarantee
DSCR below 1.25× = automatic decline — lenders calculate from tax returns, not seller claims
Standard capital stack: 80% SBA loan, 10% buyer equity, 10% seller note on standby
Structure matters more than price — model DSCR and stress-test at 20% EBITDA decline before signing LOI
Hidden deal-killers: weak tax returns, expiring leases, license transfer delays, missing org charts
Core SBA 7(a) Loan Terms: What's Fixed and What's Not
Term Length: Asset-Based
SBA guidelines split terms by asset type: 10 years for goodwill/intangibles, 25 years for real estate, 10 years for equipment. Most main-street acquisitions carry 10-year terms. If real estate comprises >40% of value, lenders split financing into two tranches, lowering monthly payments but adding documentation overhead.
Interest Rate: Prime + 2.75% Cap
For loans >$50K with terms ≥7 years, the SBA caps rates at Prime + 2.75%. As of October 31, 2025, with prime at 7.00%, your all-in rate maxes at 9.75%. Lenders price within that cap:
Pristine credit + strong DSCR: 9.50%
Average credit + moderate DSCR: 9.75%
Below-average credit: declined, not discounted
Most loans are variable. If rates spike 1.5%, verify your cushion survives.
Amortization: Fully Paid Over Term
SBA loans fully amortize with no balloon payment. A $1.5M loan at 9.75% over 10 years runs ~$19,200/month. Miss one payment, and the lender has contractual acceleration rights.
Personal Guarantee: Unlimited
Every owner with ≥20% equity signs an unlimited personal guarantee. If the business fails, the SBA pursues your house, retirement accounts, and spouse's income after liquidating company assets.
Cash-Flow-First Underwriting: How Lenders Calculate DSCR
SBA lenders care whether the business generates enough cash to make payments plus pay you a living wage plus absorb one bad quarter.
DSCR = Net Operating Income / Annual Debt Service
Minimum acceptable DSCR: 1.25× to 1.50×. Below 1.25×, you get declined. Above 1.50×, you get approved fast.
Tax Returns Drive DSCR, Not Seller Claims
Critical: Lenders calculate DSCR from tax returns, not seller-reported "SDE."
Formula major SBA lenders use:
Net Income (tax returns) + Interest + Income Taxes + Depreciation + Amortization + Verified Seller Addbacks − Unfinanced CapEx − New Owner Comp − Replacement Salaries = Cash Available for Debt Service
÷ (Annual Principal + Interest on SBA + Seller Note + Leases + LOC Interest) = DSCR
The last full tax-return year must meet minimum thresholds. Lenders also review 3-year trends and interim financials.
💡 Pro Tip: Sellers often inflate SDE with unverifiable add-backs. If tax returns show $180K net but seller claims $280K in "owner benefits," lenders credit only what tax filings verify.
Sample DSCR Calculation: Before/After Adjustments
Scenario: $1.8M landscaping company acquisition
SBA loan: $1.35M at 9.75%, 10-year term = $17,200/month = $206,400/year
Metric | Seller Claims | Tax Returns Show |
|---|---|---|
Net Income | $300,000 | $250,000 |
Verified Add-backs | — | $50,000 |
New Owner Salary | — | -$60,000 |
Net Operating Income | $300,000 | $240,000 |
DSCR | 1.45× ✅ | 1.16× ❌ |
Result: Declined. Tax returns couldn't support seller's cash-flow claims.
Adjusted scenario (stronger tax returns):
Net income: $300,000
Add-backs: $50,000
New owner salary: -$60,000
NOI: $290,000
DSCR: 1.40× ✅ Approved
Lenders stress-test at 15–20% EBITDA decline. A 1.40× base-case stressed at 20% falls to 1.12×—marginal. A 1.28× base-case gets declined outright despite hitting the technical floor.
Takeaway: Always verify seller claims against tax returns before signing your Letter of Intent (LOI).
Capital Stack Breakdown: How Leverage Splits Risk
SBA lenders finance up to 90% of acquisition price, but the practical ceiling is 80% for standard deals.
Standard Stack:
80% SBA Loan — senior lien, blanket security interest, personal guarantee
10% Buyer Equity — cash, ROBS, or pledged securities (must be "true equity")
10% Seller Note — subordinated, full standby 24 months, then 3–5 year amortization
Example: $2M Acquisition
Source | Amount | % | Terms |
|---|---|---|---|
SBA Loan | $1.6M | 80% | 10 yrs, 9.75% |
Buyer Equity | $200K | 10% | Cash at closing |
Seller Note | $200K | 10% | 24-mo standby, 5-yr amortize |
Total | $2M | 100% |
Requesting 85% SBA + 5% equity triggers heightened scrutiny or collateral pledges.
Ineligible or High-Risk Structures Lenders Decline
Earnouts — contingent purchase price can't be secured in initial lien
Seller Equity Rollover >10% — SBA views as partnership, not change-of-control
Partial Buy-Ins — must acquire >50% control at closing
Working Capital Loans — 7(a) funds acquisitions, not operating shortfalls
💡 Pro Tip: Forgivable Seller Notes Can Align Incentives
Link note forgiveness to verifiable metrics (90%+ revenue retention, 80%+ key staff retention, maintain top customers). Seller stays engaged; you benefit from transition success. Requires lender approval before closing—raise this early.
Critical: Metrics must be objective (tax returns, payroll records, contracts), not market-dependent. Base terms must still meet SBA subordination requirements.
Working-Capital Cushion: Why Lenders Add $100K–$200K
Lenders add a working-capital cushion (10–15% of annual revenue or $100K–$200K minimum) to cover transition friction: customer pauses, employee turnover, supplier credit tightening, unexpected repairs.
Example: $1.2M revenue business → $960K base loan + $150K cushion = $1.11M total SBA loan
You're paying interest from day one. Burn through it in month two, and lenders assume the business is weaker than underwritten.
Lender Evaluation Checklist: What Gets You Approved
1. DSCR ≥1.25× (from tax returns)
2. Credit: 680+ FICO, no bankruptcies (7 yrs), no liens
3. Industry Experience: 2+ years preferred; offset with transition plan, retention agreements
4. Liquidity: $50K–$150K post-close reserves (cash/near-cash)
5. Transition Plan: org chart showing who runs operations, sales, finance, HR
No org chart = no loan.
For deeper context on the SBA loan approval process, see our SBA Loan Guide here.
Deal Size Comparison: What Works vs. What Fails
Deal Type | Micro ($500K) | Typical ($2M) | Real Estate ($3M) | Failed ($1.8M) |
|---|---|---|---|---|
SBA Loan | $400K | $1.6M | $2.4M (split) | $1.53M |
Buyer Equity | $50K | $200K | $300K | $90K (5%) |
Seller Note | $50K | $200K | $300K | $180K (10%) |
Term | 10 yrs | 10 yrs | 25/10 yrs | 10 yrs |
Payment/mo | ~$5,100 | ~$20,500 | ~$13,500 | ~$19,500 |
EBITDA Req'd | $77K | $308K | $203K | $240K |
DSCR | 1.25× ✅ | 1.25× ✅ | 1.25× ✅ | 1.15× ❌ |
Why the failed deal got rejected: DSCR at 1.15× + 85% LTV + only 5% cash equity = lenders assume immediate default risk on any revenue drop.
Buyer FAQs:
How Much Down Payment Do I Need for an SBA Loan?
Most deals typically include 10% cash equity + 10% seller note. However, some deals can get done for as little as 5% cash equity and 5% seller note.
Can I Negotiate SBA Loan Terms?
Term length is fixed by SBA rules. Interest rate flex: Prime + 2.50%–2.75%. Negotiate seller-note terms (standby, interest, forgiveness) and working-capital sizing.
Can I Get an SBA Loan with 650 Credit?
Below 680 = higher rates or declines. Fix credit first: pay down debt, dispute errors, wait 6–12 months.
Do I Need Industry Experience to Get an SBA Loan?
Not required, but heavily weighted. Offset with transition plan, retention agreements, training certifications.
Can I Use Retirement Funds for the Down Payment?
Yes—via ROBS or pledged IRA. ROBS carries tax complexity; use a specialist. Pledged accounts reduce liquidity, penalizing approval odds.
Pro Tips: Details That Sink Deals Late
Documentation Lag Kills Momentum
Sellers with unclean books = red flag. If they can't produce monthly P&Ls, walk.
Quality of Earnings (QoE) Pays for Itself
A $5K–$10K Quality of Earnings (QoE) report validates EBITDA add-backs and surfaces hidden liabilities. If EBITDA drops 25% post-QoE, you just avoided disaster.
Before committing to an LOI, use The EBIT Due Diligence Checklist to ensure the target is "SBA-ready."
Standby Periods Are Non-Negotiable
Seller notes: 24–36 month standby (no payments). Without standby, SBA declines.
License Transfers Can Derail Closings
Some states take 90+ days. If licenses don't transfer before closing, SBA won't fund. Start applications the day you sign the LOI.
Lease Assignments Need Landlord Consent
Expiring in 18 months? Lenders view as existential risk. Renegotiate before purchase agreement.
Key Takeaways
Structure determines survival, not purchase price. A $2M deal at 1.66× DSCR beats a $1.5M deal at 1.28× DSCR. Model payments before negotiating price.
Expect 80% SBA, 10% equity, 10% seller note. If the seller refuses paper, ask why—they might know the business is weaker than advertised.
DSCR below 1.25× = automatic decline. Lenders calculate from tax returns, not projections. Stress-test at 20% EBITDA decline.
Personal guarantees are unlimited. If that risk terrifies you, inject more equity or reconsider acquisition entrepreneurship.
Get pre-qualified before making offers. A seller accepting your LOI based on "I think I can get SBA financing" will walk when your lender declines 60 days later.
Final note: SBA loans are the best financing tool for main-street buyers—long terms, no balloons, reasonable rates. But they're not free money. Every concession (low SBA loan down payment, long amortization) gets offset by stricter underwriting and personal-guarantee exposure. Structure your deal to maximize cash-flow cushion, not minimize equity. Businesses that survive year three enter with conservative leverage and liquid reserves. Those that fail optimized for minimum down payment and assumed nothing would go wrong.
You're buying an actively managed cash-flow stream, not a lottery ticket. Structure accordingly.
Disclaimer: This guide is for educational purposes only and does not constitute legal, financial, tax, or investment advice. Business acquisitions involve significant risks, and outcomes can vary widely based on individual circumstances. Always consult with qualified professionals including attorneys, CPAs, and financial advisors before making acquisition decisions. The EBIT Community does not guarantee the accuracy of information provided or the success of any acquisition strategy. Past performance and examples do not guarantee future results.
