Most self-funded searchers buy their first business with an SBA 7(a) loan. Understanding its mechanics changes which deals you can pursue and how you structure an offer.
The basics
The SBA guarantees a large share of the loan, which is why banks will lend against a business’s cash flow with a relatively small down payment — a minimum 10% equity injection. Acquisition loans typically run up to a 10-year term, at a rate tied to the prime rate plus a spread.
The number that decides everything
Lenders approve or decline largely on the Debt-Service Coverage Ratio (DSCR): the business’s cash flow divided by its annual loan payments. Below roughly 1.15× most lenders pass; 1.25× or better is comfortable. This is why an over-priced deal simply won’t finance — the payments outrun the cash flow.
Structure to your advantage
A seller note can reduce the bank loan and, when placed on standby, sometimes counts toward your equity injection. Model the payment and coverage before you make an offer, using the free SBA loan and DSCR calculators, so you only pursue deals that can actually close.