Securing the right financing is one of the most critical steps in buying a business. While options like conventional bank loans and private equity exist, the SBA 7(a) loan remains the premier choice for many acquisition entrepreneurs. Here is how the SBA 7(a) loan compares to other financing methods and why it often provides the strongest advantage for buyers.
The SBA 7(a) Advantage
The SBA 7(a) loan is a government-backed program designed to make capital accessible. It is particularly advantageous for small business acquisitions because it lowers the barrier to entry. Its standout features include:
- High Leverage: Up to 90% loan-to-purchase financing.
- Cash Flow Friendly: 10-year repayment terms help keep monthly payments manageable.
- Low Down Payment: Borrowers often only need a 10% equity injection.
- Flexibility: You can include working capital in the loan.
How It Compares to Alternatives
SBA 7(a) vs. Seller Financing
Seller financing involves the seller “carrying a note” for part of the price. While it aligns incentives and offers flexible terms, it rarely covers the full purchase price and often comes with shorter repayment timelines than the SBA’s 10-year term.
- The Winning Strategy: Many buyers use seller financing in conjunction with an SBA loan. If structured correctly (on full standby), a seller note can even count toward your equity injection, reducing the cash you need to bring to the table.
SBA 7(a) vs. Conventional Bank Loans
Traditional commercial loans avoid the government paperwork, but the barrier to entry is significantly higher. Banks typically require 25% to 40% down payments and substantial collateral.
- The SBA Edge: For first-time buyers or those looking to preserve liquidity, the SBA’s 10% down payment requirement is far more attractive than the heavy capital requirements of conventional lending.
SBA 7(a) vs. Private Equity
Taking capital from private investors or equity funds is useful for large deals, but it comes at a cost: loss of ownership and control.
- The SBA Edge: An SBA loan allows you to retain full equity and operational control of the business you are buying, without answering to outside investors.
A Note on Deal Structure
While SBA loans are flexible, they have specific rules. For instance, “earnouts” (performance-based future payments) are not allowed. However, buyers can utilize rollover equity, where the seller keeps a minority stake. This keeps the seller invested in the company’s success while satisfying SBA requirements, provided the buyer retains a controlling (51%+) interest.
What’s the Best Option for You?
Every deal is unique, but for the majority of entrepreneurs targeting transactions under $5 million, the SBA 7(a) loan offers an unbeatable combination of low equity requirements, long terms, and competitive rates.At Synergy Commercial Funding, we help buyers navigate these options to build the capital stack that best fits their acquisition goals.
Are you looking for financing options for your business? If so, Synergy Commercial Funding is ready to help. We offer a wide range of commercial finance services to help businesses of all sizes achieve their objectives, whether it’s purchasing new equipment or purchasing a new commercial property.
Interested in creating a second line of income just by talking with your existing network? Want to help the economy grow by helping businesses around you grow? Think about becoming a Synergy Commercial Funding Partner. Visit our "Referral & Broker Program" to learn more.
