Using an SBA 7(a) Loan to Buy a Business

Quick answer: Yes, an SBA 7(a) loan can be used to buy a business. The SBA lists changes of ownership, complete or partial, as a permitted use, and the maximum loan amount is $5 million. You apply through a lender, not through the SBA, and the business must meet the program’s eligibility rules. For an Illinois buyer, the financing agreement also matters for another reason: it goes in with the Form CBS-1 bulk sale notice when that notice applies.

Money is usually the first question when someone decides to buy instead of build. I’m a lawyer, not a lender, so I can’t tell you whether a bank will say yes. What I can do is help you understand how the loan and the legal documents have to fit together, because a loan commitment and a purchase contract written without each other can cost you time and coins.

What can a 7(a) loan be used for?

The SBA describes 7(a) as its primary business loan program, providing a loan guarantee to lenders. The permitted uses it lists are:

• acquiring, refinancing or improving real estate and buildings;
• short- and long-term working capital;
• refinancing current business debt;
• purchasing and installing machinery and equipment;
• purchasing furniture, fixtures and supplies;
• changes of ownership, complete or partial; and
• multiple purpose loans that include any of the above.

So a single loan may be able to cover more than the purchase price. Talk to your lender about what you actually need, including what it will take to run the place on day one. The SBA’s first step for buyers is to decide how much you’re willing to spend to purchase and ultimately manage the business. There’s more on that in what to check before you sign.

Who is eligible?

The SBA says that to be eligible for 7(a) assistance, businesses must:

• be an operating business;
• operate for profit;
• be located in the U.S.;
• be small under SBA size requirements;
• not be a type of ineligible business;
• not be able to obtain the desired credit on reasonable terms from non-federal, non-state and non-local government sources; and
• be creditworthy and demonstrate a reasonable ability to repay the loan.

Key eligibility factors are based on what the business does to receive its income, its credit history and where it operates. The SBA also says lenders may look at credit scores or credit history of the applicant, associates and guarantors, and that cash flow, equity or collateral may be considered. The SBA makes the final determination on the eligibility of the applicant.

Read “guarantors” twice. Ask your lender up front who will be asked to sign what, and what that means for your personal assets. Protecting personal assets is a big part of why you choose the right legal structure in the first place, so we want that conversation happening at the same time.

What are the numbers?

Term	Standard 7(a)	7(a) Small
Loan amount	$350,001 to $5 million	$350,000 or less
Maximum SBA guarantee	75%	85% up to $150,000; 75% above that
Interest rate	Negotiated, may not exceed the SBA maximum	Negotiated, may not exceed the SBA maximum
SBA turnaround time	5-10 business days	2-10 business days
Collateral	SBA treats a loan as fully secured if the lender has security interests in the assets being acquired and available fixed assets of the applicant, up to the loan amount	No SBA collateral requirement at $50,000 or less; above that, the lender’s own written policies

Check these on the SBA’s page before you rely on them, since program terms can change. And remember what the guarantee is: if a borrower defaults, the lender may ask the SBA to purchase the guaranteed portion. It protects the lender. It isn’t protection for you.

Most 7(a) term loans are repaid with monthly payments of principal and interest from the cash flow of the business. That’s why the cash flow method is one of the valuation approaches the SBA names: it’s typically used to determine how much of a loan the business’s cash flow can support.

How does the loan fit with your purchase contract?

This is where I come in. A few places where the paper touches:

• Timing. The contract needs to give you time to get financing. Make sure your deal doesn’t require you to close before your lender can.
• The financing agreement. In an Illinois bulk sale, the CBS-1 notice must include a copy of the financing agreement and the sales contract, and it has to be filed at least 10 business days before the sale. If the terms change, an updated form with the updated documents must be submitted immediately.
• The lease. If the business operates from rented space, the commercial lease is part of whether the business your lender is underwriting can stay where it is.
• The allocation. How the price gets divided shows up on IRS Form 8594, and it may matter to your accountant and your lender.

Your lender will tell you which documents it needs. The SBA says the contents of the application vary depending on the size of the loan and the lender’s processing method.

How do you find a lender?

The SBA says to apply directly through a local lender, and that you can reach out to your local District Office with questions or use its Lender Match tool to connect with a participating SBA lender. I’d go in with your purchase documents organized and your questions written down. Ask what they need, how long it takes and who signs.

Why talk to the Bosses’ Lawyer about this?

Because financing and legal timelines run side by side, and somebody needs to be watching both. I’m a Chicago business attorney licensed in Illinois, and I’ll help you get the contract, the entity and the lease lined up so your deal doesn’t stall when the lender starts asking questions. See my page on buying a small business in Illinois, then book a discovery call or call 866-217-3432.