How to Buy a Business With an SBA Loan: Down Payment, Seller Notes, and Timeline

Acquisitions are where I see the most late surprises, usually the seller note, the valuation, or the buyer's cash. SBA rewrote its change-of-ownership rules in Appendix 15 of SOP 50 10 8.1, effective October 1, 2026. Here's how they work.

A note on who we are: as an SBA correspondent lender, Cressida Direct works with SBA wholesale lenders to place 7(a) and 504 loans. The SBA lender, and SBA where applicable, makes the eligibility and credit decisions.

What kind of acquisition is it under SBA rules?

SBA sorts acquisitions into four types, and the type sets the rules:

• Initial Acquisition (the default). A new majority or largest owner buys the business. This includes an employee with less than 24 months at the company.
• Business Expansion. An existing business that has operated at least two full fiscal years under current ownership buys 100% of another business in the same four-digit NAICS industry group.
• Owner Buyout. Existing owners, or employees with at least 24 months in the business, buy out a partner.
• ESOP and Cooperative. An employee trust or co-op buys a controlling interest.

This article focuses on Initial Acquisitions, the usual case for an outside buyer. The lender must document any other category.

How much down payment do you need to buy a business with an SBA loan?

For an Initial Acquisition, the minimum equity injection is 10% of total project cost. That's every cost needed to close and operate, regardless of who funds it, except lines of credit and 504 loans. SBA says the lender can't reduce or eliminate this 10% for an Initial Acquisition. For Business Expansions and Owner Buyouts, the lender may reduce or waive it if the business has enough liquidity and positive net worth.

Equity that counts without limit:

• Cash that isn't borrowed, including gifts
• A personal loan to a guarantor, if it's repaid from a source other than the business
• Grants with no repayment or clawback during the loan term
• Verified prepaid expenses, such as the valuation or QoE fees you've already paid

Two more rules matter here. If the price is higher than the business valuation supports, the buyer has to cover the difference with equity. And SBA prohibits seller earnouts.

How do seller notes work in an SBA business acquisition?

This is where deals get re-traded, so I'll be precise. Under Appendix 15:

• A seller note counts toward your equity only if it's subordinated to the lender and on full standby: no principal and no interest payments for the full term of the 7(a) loan. Interest may accrue and be paid after the SBA loan is repaid.
• Seller debt is a "limited" equity source. All limited sources together, including seller notes, other standby debt, and certain minority equity investments, can supply no more than half of the required injection. On a 10% injection, that's 5% of project cost. The other 5% has to come from the buyer.
• The 24-month standby that older SOPs allowed is gone.
• A seller note that isn't on full standby doesn't count as equity. It still counts toward total debt, which can't exceed the business valuation and must be supported by cash flow.

My practical advice: negotiate the seller note at the letter-of-intent stage, knowing the seller won't see a payment for the life of the SBA loan. That conversation is much easier before the purchase agreement is drafted.

What debt service coverage does SBA require for a business purchase?

For an Initial Acquisition, the business must show a DSCR of at least 1.25x. The lender measures this on the last fiscal year-end, or an average of the last two, on a historical or adjusted basis. For a Business Expansion the minimum is 1.15x. Lenders can make documented adjustments, such as normalizing owner compensation, but those adjustments have to hold up in a global cash flow analysis.

The lender uses three years of financials at the highest reporting level available, the current and prior-year interims, and checks tax returns against IRS transcripts.

When do you need a business valuation or a Quality of Earnings report?

Business valuation. Every SBA acquisition needs one, ordered by and prepared for the lender, not the buyer or seller. It must come from an accredited "Qualified Source" (ASA, CBA, ABV, CVA, or BCA). If the business purchase price, excluding real estate, is $350,000 or less, the lender may do its own valuation unless the buyer and seller have a close relationship.

Quality of Earnings (QoE). For Initial Acquisitions and Business Expansions with a business purchase price of $3 million or more, the lender also needs a QoE. The $3 million is measured before equity, seller debt, or other financing. The QoE has to be independent and done for the lender's benefit. It can't be prepared by or for the seller. The lender sizes the loan off the QoE earnings, so a weak QoE can shrink the loan.

Can the seller stay involved after the sale?

In an Initial Acquisition or Business Expansion, the seller generally can't stay on as an owner, officer, director, or employee. The business can hire the seller as a consultant for up to 24 months in total, including extensions. In a partial owner buyout, a seller who keeps a stake can stay on. A seller left with less than 20% must guarantee the loan for at least two years after final disbursement.

Who is eligible to buy a business with an SBA loan?

Start with ownership. Since March 1, 2026, 100% of direct and indirect owners and SBA-required guarantors must be U.S. citizens or U.S. nationals with a principal residence in the U.S., its territories, or possessions. Green card holders can't own any share. The SOP also looks back six months before the SBA loan number is issued.

The usual 7(a) rules also apply: an operating, for-profit small business, unlimited personal guaranties from anyone owning 20% or more after the sale, and lender site visits. A single 7(a) loan tops out at $5 million. The business portion amortizes over no more than 10 years. Real estate bought in the same deal can stretch toward 25 years on a separate or blended structure. Our SBA 7(a) requirements checklist covers the general rules, and SBA Loan Changes in 2026 explains what's new.

How long does it take to buy a business with an SBA loan?

SBA doesn't publish a standard timeline for acquisitions, so treat the ranges below as typical, not promised. Every deal moves at the speed of its slowest document.

1. Pre-screen and LOI (typically 1–3 weeks). Confirm ownership eligibility, cash for equity, and rough DSCR before signing a letter of intent. Structure the seller note here.
2. Lender review and term sheet (typically 1–3 weeks). Three years of returns, interims, a debt schedule, the buyer's resume, and SBA Form 413.
3. Third-party reports (typically 3–6 weeks, often in parallel). Business valuation, QoE at $3 million or more, and any appraisal.
4. Underwriting, approval, and SBA loan number (typically 2–4 weeks). The SOP that applies is tied to the date SBA receives the application, which the SOP defines as the date the loan is approved and numbered.
5. Closing (typically 2–4 weeks). Purchase agreement, seller-note standby agreement, insurance, and equity verification.

From a complete file, many acquisitions close in roughly two to four months. Missing financials, a late QoE, or a seller note that has to be renegotiated is what pushes it longer. Some SOP clocks also matter: personal financial statements must be dated within 90 days of approval, and real estate appraisals within 12 months of the application.

How should brokers and referral partners pre-screen an acquisition?

Business brokers, CPAs, and attorneys see these deals first. A short screen saves money on reports:

1. Ownership: Is every buyer, direct and indirect, a U.S. citizen or national living in the U.S.?
2. Cash: Does the buyer have at least 5% of total project cost in their own unborrowed funds, plus reserves?
3. Seller note: Will the seller accept full standby for the life of the loan? If not, it doesn't count as equity.
4. Cash flow: Does the last full year (or two-year average) support 1.25x after the new debt?
5. Price: Is the asking price realistic against a third-party valuation? Is it over $3 million, so a QoE is required?
6. Seller transition: Is everyone comfortable with a consulting period of no more than 24 months?

If it clears, register as a broker partner and send it over. See also why brokers lose deals before they submit them.

Frequently asked questions

What is the minimum down payment to buy a business with an SBA loan?

For an Initial Acquisition, at least 10% of total project cost, and the lender can't waive it. Up to half can come from a seller note on full standby.

Can a seller note be used as the down payment on an SBA loan?

Partly. A seller note counts only if it's subordinated and on full standby, with no principal or interest payments, for the full term of the 7(a) loan. Together with other limited sources, it can cover no more than half of the required equity, or 5% of project cost on a 10% injection.

What DSCR do I need to buy a business with an SBA 7(a) loan?

At least 1.25x for an Initial Acquisition, based on the last fiscal year or a two-year average. Business Expansions need 1.15x.

When does an SBA business acquisition need a Quality of Earnings report?

When the business purchase price, excluding real estate, is $3 million or more on an Initial Acquisition or Business Expansion.

How long can the seller stay after an SBA-financed sale?

In an Initial Acquisition or Business Expansion, the seller can stay only as a consultant, for up to 24 months in total.

Can a green card holder buy a business with an SBA loan?

Not as an owner. Since March 1, 2026, all owners must be U.S. citizens or U.S. nationals with a principal residence in the U.S.

Does Cressida Direct make SBA acquisition loans?

As an SBA correspondent lender, Cressida Direct works with SBA wholesale lenders to place 7(a) and 504 loans. The SBA lender makes the credit decision.

Thinking about buying a business?

Before you sign an LOI, call me at 877.308.7557 or contact our team, and we'll walk through equity, the seller note, and cash flow. Ready to start? Begin an application, or review our SBA 504 & 7(a) program page.

This article is general information, not a loan commitment or legal, tax, or valuation advice. SBA requirements change, and final eligibility is determined by the SBA lender and SBA.

About the author

Sources

1. U.S. Small Business Administration, SOP 50 10 8.1, Lender and Development Company Loan Programs with Technical Policy Updates, Appendix 15: 7(a) Changes of Ownership (published Sept. 25, 2026; effective Oct. 1, 2026). https://www.sba.gov/document/sop-50-10-lender-development-company-loan-programs
2. SBA Information Notice 5000-882227, Issuance of Technical Updates to SOP 50 10 8.1 (Sept. 25, 2026). https://www.sba.gov/document/information-notice-5000-882227-issuance-technical-updates-sop-50-10-81
3. SBA Policy Notice 5000-876441, Citizenship and Residency Requirements (effective Mar. 1, 2026). https://www.sba.gov/document/policy-notice-5000-876441-update-sop-50-10-8-citizenship-residency-requirements-recission-procedural-notice-5000-872050
4. SBA, 7(a) loans program page. https://www.sba.gov/funding-programs/loans/7a-loans
5. 13 CFR 120.202 (loans for changes of ownership), via eCFR. https://www.ecfr.gov/current/title-13/section-120.202