Money & Financing
How SBA Loans Work
A government-backed loan program designed for small-business acquisitions.
Practical Explanation
The Small Business Administration (SBA) doesn't lend money directly — it guarantees a portion of loans made by approved banks. That guarantee makes lenders comfortable lending to first-time buyers with limited collateral. The two most common programs for business acquisitions are SBA 7(a) (up to $5M) and SBA 504 (real estate plus equipment).
Real-World Example
A buyer with $80,000 in savings uses an SBA 7(a) loan to buy a $700,000 dry-cleaning business with 10% down and a 10-year amortization at prime + 2.75%.
Typical cash required
Typically 10% equity injection on a 7(a) acquisition loan.
Experience required
Management or industry experience strongly preferred. Personal credit usually 680+.
Advantages
- ✓Low down payment vs. conventional financing
- ✓Long amortization (up to 10 years for business acquisitions)
- ✓Fixed or variable rates with regulated caps
- ✓Available to first-time buyers
Risks
- !Personal guarantee from every 20%+ owner
- !Strict documentation and underwriting timeline (60–90 days)
- !Liens on personal assets, including home equity in some cases
Frequently Asked Questions
How long does SBA approval take?
Plan on 60–90 days from application to funding, sometimes faster with a preferred SBA lender.
What's the difference between 7(a) and 504?
7(a) is general purpose, including business acquisitions. 504 is mainly for owner-occupied real estate and large equipment.
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