A Beginner's Guide to Getting an SBA Loan to Buy a Business

Securing an SBA loan to purchase a business can feel daunting, but it’s a popular and accessible financing option. SBA loans, backed by the U.S. government, offer favorable terms like lower down payments (as little as 0%-10%), competitive interest rates, and extended repayment periods of up to 25 years.

The SBA 7(a) Loan Program is the primary option for business acquisitions, with loan amounts up to $5 million. To qualify, you’ll need a solid credit score (typically 650+), meet SBA’s small business criteria, and provide detailed financial and operational documentation.

Key Points:

• Loan Types: SBA 7(a) loans for business purchases; SBA 504 loans for real estate or equipment.
• Benefits: Lower down payments, flexible collateral requirements, and long repayment terms.
• Eligibility: Strong credit, small business size standards, and U.S.-based operations.
• Preparation: Gather tax returns, financial statements, purchase agreements, and a business plan.
• Timeline: Approval can take 30-90 days, depending on the lender.

By choosing an experienced SBA lender and preparing thoroughly, you can improve your odds of approval and secure the funding needed to buy a business.

How to Buy a Business with an SBA Loan

Who Can Get an SBA Loan

Before diving into the application process, it's important to consider the SBA's specific requirements, which range from personal creditworthiness to business size and financial commitments.

Personal Requirements for Borrowers

One of the key factors lenders evaluate is creditworthiness. While the SBA doesn't set exact credit score minimums, lenders generally expect a credit score around 690 or higher. However, lower scores may still qualify depending on the loan type. For example, SBA 7(a) loans of $350,000 or less require a FICO SBSS score of at least 165 to pass the prescreening process. Here's a breakdown of credit expectations across different SBA loan programs:

Lenders also assess factors like personal and business credit histories, time in business, and overall financial health. Since payment history accounts for 35% of your FICO score^[4], consistently paying bills on time is crucial.

A personal guarantee is mandatory for anyone owning 20% or more of the business. Keep in mind, delinquent government debt will disqualify you from eligibility, and certain criminal records could impact your application depending on the offense.

To strengthen your credit profile before applying, check your credit report for inaccuracies, dispute any errors, reduce your credit utilization, and maintain a solid track record of on-time payments^[4]. Beyond personal metrics, your business itself must meet specific size and financial criteria.

Business Size and Financial Requirements

To qualify for an SBA loan, your business must meet the SBA's size standards, which define what qualifies as a "small" business. These standards vary by industry and are typically based on employee count or annual revenue^[6].

For example:

• Most manufacturing businesses with 500 or fewer employees qualify.
• Most non-manufacturing businesses with average annual receipts under $7.5 million also meet the criteria^[5].

The SBA determines size standards using the North American Industry Classification System (NAICS) codes and considers not just the target business but also any affiliated companies or subsidiaries when calculating size^[9].

In addition to meeting size standards, the business must be:

• For-profit
• Independently owned and operated
• Not nationally dominant in its field
• Physically located and operating in the U.S. or its territories^[6].

While most lenders prefer businesses with at least two years of operating history, some may work with newer ventures. You'll also need to demonstrate strong annual revenue and provide reliable cash flow projections to show the business can handle loan payments.

The SBA's Size Standards Tool can help you verify whether your business qualifies as small for government contracting^[5]. You can also check the SBA's industry-specific size standards table for more details^[7].

Down Payment and Collateral Requirements

SBA loans require collateral, but their requirements are more lenient compared to conventional loans. Down payments are also typically lower, making SBA loans more accessible.

For example:

• SBA 7(a) loans often require down payments between 0% and 10%^[11].
• SBA 504 loans generally require at least a 10% down payment^[11].

Since SBA loans can cover up to 90% of the purchase price^[1], upfront costs are often more manageable. Here's a summary of down payment requirements:

Collateral requirements depend on the loan amount. Loans under $50,000 often require no collateral (except for International Trade loans)^[12]. For loans between $50,001 and $500,000, lenders follow their internal policies, and applications won't be denied solely due to insufficient collateral^[12].

Collateral can include business assets like real estate, equipment, accounts receivable, and inventory, as well as personal assets owned by the borrower^[10]. If you're concerned about meeting the down payment, consider funding options such as personal savings, gifted funds, 401(k)/IRA funds, seller financing, or existing business assets^[11].

Seller financing can be particularly helpful, as it reduces the cash you need upfront and can bridge the gap between the SBA loan amount and the total purchase price. This makes it an attractive option, especially for first-time buyers.

How to Apply for an SBA Loan

Applying for an SBA loan involves three key stages: preparing your application, selecting the right lender, and navigating the review and approval process. Each step demands careful attention to detail and thorough documentation.

Getting Ready to Apply

Preparation is essential when applying for an SBA loan. Lenders want a clear understanding of your personal financial background and the specifics of the business you're looking to acquire. Start by evaluating your personal finances, including your net worth and any outside income. This self-assessment will help you identify potential areas to strengthen before submitting your application.

Gathering the necessary documentation in advance can save time and streamline the process. Key documents typically include:

Business Purchase Documents:

• Agreement to purchase the business
• Letter of intent to buy the business
• Details of any current liens on the business

Financial Documentation:

• Tax returns for the past three years for the business
• Current financial statements, including a profit and loss statement, balance sheet, and three months of bank statements
• Proof of business assets

Legal and Operational Documents:

• Long-term business contracts
• Incorporation documents and licenses
• Business formation records (e.g., DBA, articles of incorporation, ownership agreements)
• A business plan and details of your relevant experience

Consider consulting professionals like accountants, lawyers, or valuation experts to ensure your documentation is accurate and complete. Their expertise can help improve your chances of approval and simplify the process.

For loans exceeding $250,000, an independent business valuation is usually required. Lenders often handle valuations for smaller loans, but this step still adds another layer of preparation.

Once your documentation is ready, the next step is finding a lender experienced in handling SBA loans.

Finding the Right SBA Lender

SBA loans are issued by banks, credit unions, and other financial institutions - not directly by the government. Choosing a lender with experience in SBA lending and business acquisitions is crucial.

Preferred Lenders (PLP) can independently make credit decisions, which can speed up the process. In the 2025 fiscal year, these lenders approved over 18,000 SBA 7(a) loans worth more than $10 billion, accounting for over 60% of all approved loans ^[13].

Start by reaching out to financial institutions you already have a relationship with. Their familiarity with your financial history could work to your advantage. Additionally, the SBA Lender Match tool can help you connect with lenders suited to your needs.

When evaluating lenders, focus on those with a strong track record in SBA lending. For example:

• Huntington National Bank approved over 2,000 SBA 7(a) loans totaling more than $575 million in FY 2025 ^[13].
• Newtek Bank issued over $1 billion in funding across more than 2,000 SBA 7(a) loans in the same period ^[13].
• Northeast Bank approved over 3,000 SBA 7(a) loans totaling more than $500 million in FY 2025 ^[13].

Ask potential lenders about their experience with SBA loans, including:

• Interest rates and loan amounts
• Repayment terms and any prepayment penalties
• Minimum credit score requirements
• Time-in-business criteria
• Whether they provide a dedicated loan specialist
• Estimated approval timelines

"Most business owners don't realize that while SBA loans can be a beneficial option for new businesses, SBA loans are primarily used to help finance mature, strong, and growing companies." – First National 1870 ^[14]

Review, Approval, and Closing Process

After selecting a lender, the focus shifts to the review and approval process. On average, the SBA loan process takes 30 to 90 days from application to funding ^[15]. It starts with underwriting, where your lender evaluates your financial and credit history. Accurate and complete documentation is critical - only about 34% of SBA loans and lines of credit were fully approved in 2023 ^[15].

Processing times vary by lender type:

Once the lender approves your application, the SBA conducts a final review. Working with a Preferred Lender can speed up this step, as they can process applications independently.

Different SBA loan types have varying approval timelines:

• SBA Express Loans: Funding within 30–60 days ^[16]
• SBA 7(a) Loans: Full process takes 60–90 days ^[16]
• SBA 504 Loans: Funding completed within 90 days ^[16]
• SBA Microloans: Approval and funding in 30–60 days ^[16]

Throughout the process, maintain clear and prompt communication with your lender to avoid delays.

The final step is the closing process, which includes reviewing additional documents, signing the loan agreement, and transferring funds. Your lender will guide you through these steps to ensure all legal requirements are met before the funds are released.

As a reference, the average SBA 7(a) loan size is $436,270, while the average SBA 504 loan size is $1,157,142 as of March 8, 2025 ^[15]. These figures can give you an idea of typical funding amounts for business acquisitions.

Common Problems and How to Avoid Them

Even with thorough preparation, many SBA loan applications encounter hurdles that can delay approval or even result in denial. By understanding these common issues and addressing them head-on, you can greatly increase your chances of success.

Mistakes That Can Hurt Your Application

One of the biggest stumbling blocks is insufficient or inaccurate documentation. When financial documents are inconsistent, poorly organized, or contain errors, lenders may view your business as high-risk. Disorganized paperwork can suggest financial mismanagement.

"Financial documents are the backbone of your SBA 504 loan application." ^[19]

Double-check all figures in your financial statements, and consider hiring an accountant to ensure accuracy before submitting your application.

Another common issue is unrealistic financial projections. Lenders can quickly identify projections that lack historical data or market research. Instead of relying on overly optimistic scenarios, base your projections on actual business performance and realistic market trends.

Poor credit health can also derail your application early on. High levels of personal or business credit debt often lead to immediate rejection.

Inadequate cash flow coverage is another critical issue. Lenders require a cash flow ratio of $1.25 for every $1 of debt:

"The cash flow of the Applicant is the primary source of repayment, not any expected recovery from the liquidation of collateral. Thus, if the Lender's financial analysis demonstrates that the Applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available or outside sources of repayment." ^[21]

Additionally, insufficient equity investment can weaken your application. SBA loans typically require a down payment of 10% to 30% ^[18], and lenders expect to see that you have personally invested in the business. Failing to show this commitment can hurt your chances.

How to Make Your Application Stronger

To avoid these pitfalls and submit a strong application, consider these strategies:

• Work with Experienced Professionals: Navigating SBA loan requirements can be complex. A CPA can help reconcile your financial records and ensure everything is accurate before submission.

"Bankers are not venture capitalists or angel investors. We are lenders. We need to take safe, prudent risks with the depositors' money to make sure we get it all back plus interest." - David Vernich, Commercial Loan Officer ^[20]

• Develop a Comprehensive Business Plan: Clearly outline how you plan to use the loan to grow your business. Include detailed market analysis, realistic financial projections, and a clear strategy to demonstrate you understand both the opportunities and risks.
• Address Credit Issues Early: Review your personal and business credit scores well in advance of applying. Focus on making on-time payments, lowering your credit utilization, and paying off existing debts. Resolve any outstanding tax liabilities ^[22], as these can disqualify your application.
• Organize Your Documentation: Present your materials in a structured format, including a loan request summary, complete financials, legal documents, and purchase agreements. Clear organization can help avoid delays.
• Show Strong Financial Management: Ensure your financial records are consistent and accurate. A CPA can help reconcile your books and resolve discrepancies. Lenders want proof of sound financial practices.

"Small businesses should understand that the first thing they should provide is numbers -- numbers that can represent that they can pay back the business loan." - Paul Jennifer, Merchant Cash Advance Expert ^[20]

• Provide Adequate Collateral: Identify assets that can secure the loan and ensure you have proper control over them. Having valuable collateral strengthens your application.
• Maintain Stability: Avoid major changes to your business operations, ownership structure, or financial arrangements during the application process. Consistency reassures lenders.
• Communicate Professionally: Respond promptly to lender inquiries and maintain regular communication throughout the review process. Treat this as a professional investment - banks in the SmartBiz network typically charge a one-time application fee of no more than $3,000 ^[17].

While the SBA honors about 97% of its guarantees ^[22], approval ultimately depends on meeting strict lending criteria and presenting a well-prepared case for your business acquisition. By addressing these areas, you can improve your odds of securing the funding you need.

7(a) Loans vs. 504 Loans: Which Is Right for You

When it comes to financing a business purchase, choosing the right SBA loan can make all the difference. Understanding how 7(a) and 504 loans work - and how they compare - can help you make the best choice for your specific needs.

How Each Program Works

SBA 7(a) loans are known for their flexibility. They can be used for a wide range of purposes, including expanding, acquiring, or starting a business. These loans also cover working capital, inventory, or even refinancing debt. Borrowers can access up to $5 million, with interest rates ranging from 8% to 10.50% as of June 26, 2025. Rates are negotiated with the lender but must stay within SBA limits tied to the prime rate. Borrowers can choose between fixed or variable rates, and repayment terms for real estate purchases can go up to 25 years ^[3][8].

In 2024, over 70,000 7(a) loans were approved, compared to nearly 6,000 for 504 loans. By mid-2025, the numbers stood at about 38,000 and 3,000, respectively ^[24].

On the other hand, SBA 504 loans are designed for financing fixed assets like commercial real estate or heavy equipment. These loans offer fixed interest rates, currently between 6.50% and 8.50% as of June 26, 2025, tied to the 10-year U.S. Treasury rate. Repayment terms span 10, 20, or 25 years. Borrowers typically need to provide a 10% down payment, and the loan structure includes 50% funding from a private lender, 40% from a Certified Development Company (CDC), and 10% from the borrower ^[3][23][25].

The following table highlights the key differences between these two loan programs:

Comparing 7(a) and 504 Loans

Which Loan Fits Your Needs?

If you're buying a business, the 7(a) loan is usually the go-to option. It offers unmatched flexibility, allowing you to finance the business purchase, cover working capital, and even include real estate if the deal involves property. In contrast, 504 loans are tailored for real estate and equipment purchases, making them unsuitable for most business acquisitions.

Cost is another factor to consider. While 504 loans often have lower interest rates, they come with additional fees, including CDC processing fees, attorney fees, underwriting fees, and a 2.15% one-time SBA fee ^[25]. Meanwhile, 7(a) loans require an upfront guaranty fee, which can be higher for loans over $1 million ^[3][8].

For most buyers, the 7(a) program not only offers more versatility but is often the only SBA option when acquiring a business. If your purchase involves real estate or equipment without a business transfer, a 504 loan could be a better fit. Otherwise, focus on building a strong 7(a) loan application to secure the financing you need.

Next Steps for Getting Your SBA Loan

Securing an SBA loan to buy a business requires careful planning and attention to detail. The process typically takes 60 to 90 days from start to funding, depending on the loan amount and how well-prepared you are ^[26].

Start by pre-qualifying to confirm your eligibility. This initial step helps you determine if you meet the basic requirements and can save you time later. Once you’re ready to proceed, gather all necessary financial and legal documents related to the business you plan to purchase.

Finding the right lender is a critical step. Use the SBA Lender Match tool to connect with lenders experienced in business acquisition loans ^[2]. Working with SBA-preferred lenders can be especially helpful since they tend to process applications more efficiently and are familiar with the program's requirements ^[28].

Your personal credit plays a big role in the approval process. A credit score of 680 or higher significantly boosts your chances ^[28]. If your score falls short, focus on improving it by paying down debts and ensuring all payments are made on time before applying ^[27].

Throughout the process, maintain open communication with your lender. They’ll guide you through their specific requirements and assist in properly preparing your application ^[26]. Once approved, you’ll move to the packaging and closing stage, where you’ll need to submit additional documents from a checklist provided by the lender ^[26]. Responding quickly to any requests during this phase helps keep things on track. You’ll also work with attorneys and closing counsel to finalize the legal aspects of the transaction ^[26].

After funding is complete, you’ll be introduced to a payment servicer who will be your main point of contact throughout the loan repayment period ^[26].

Preparation and transparency are key to success. Be upfront about any financial challenges in your background, as lenders value honesty and proactive problem-solving ^[28]. Additionally, having experience in the industry - or partnering with someone who does - can strengthen your application ^[27].

With 52% of SBA loan applicants receiving approval in recent years, thorough preparation and working with experienced lenders can greatly improve your chances ^[27]. These steps not only help secure the loan but also lay the foundation for managing your loan repayment and growing your business in the long term.