Loan to Buy a Business: How to Finance the Purchase of an Existing Business (2026)

Last updated: October 2026

A business loan to buy an existing business is usually an SBA 7(a) loan, a conventional bank term loan, or a mix of a loan and seller financing. The lender underwrites the business you are buying more than the business you have: it wants a lender-ordered valuation that supports the price, historical cash flow that covers the new debt (SBA now requires 1.25x for most purchases), and a down payment from you of at least 10% for an SBA deal or often 20% to 30% at a bank. SBA 7(a) loans go up to $5 million with terms up to 10 years, longer only for any real estate in the deal. SBA's rules for acquisitions changed on October 1, 2026; the details are below.

Ways to finance the purchase of an existing business

Option	Typical size	Down payment	Term	Best for
SBA 7(a) loan	Up to $5 million	At least 10% of total project cost	Up to 10 years (real estate portion can run longer)	Most small business purchases, especially where much of the price is goodwill
Conventional bank term loan	Set by the bank	Often 20% to 30%	Usually shorter than SBA	Buyers with strong credit, industry experience and collateral
Seller financing (seller note)	A portion of the price, negotiated	Part of the deal structure	Negotiated	Closing a gap and keeping the seller invested in the transition
SBA 504 loan	SBA portion up to $5 million	Usually 10% or more	Up to 25 years	Only the real estate or major equipment in a purchase, not goodwill
Equipment financing or asset-based lending	Based on the value of the equipment, receivables or inventory	Varies	Varies	Asset-heavy businesses; often layered on a main loan
Retirement funds (ROBS)	Your eligible 401(k) or IRA balance	Not a loan	None	Funding the down payment without borrowing it

Short-term online loans and merchant cash advances are a poor fit for the purchase price itself. Their terms are measured in months, while goodwill takes years to pay off. (A merchant cash advance is also not a loan; it is a sale of future receivables.)

SBA 7(a): the most common loan to buy a business

SBA does not lend directly. It guarantees part of a loan made by a bank or other SBA lender, which lets the lender finance goodwill with a smaller down payment and a longer term than it would on its own. Proceeds can cover the purchase price, working capital, equipment, and related closing costs. For a deeper primer, read what is an SBA loan.

What changed on October 1, 2026 (SOP 50 10 8.1)

SBA's lending rulebook, SOP 50 10 8.1, applies to loans approved from October 1, 2026. It sorts every change of ownership into a category, and the rules depend on the category. Most first-time buyers fall into the default, "Initial Acquisition." The main points for buyers:

• Cash flow test: at least 1.25x debt service coverage for Initial Acquisitions and owner buyouts, up from a single 1.15x hurdle under the previous SOP. It is measured on the last fiscal year or the average of the last two, using historical results. Projections can no longer fill the gap.
• Business Expansion exception (1.15x): applies only when an existing business with at least two full fiscal years under current ownership buys another business in the same four-digit NAICS industry group.
• Equity injection: at least 10% of total project costs for an Initial Acquisition, with no reduction allowed.
• Seller note limits: a seller note counts toward your 10% only if it is on full standby (no principal or interest payments) for the life of the SBA loan. Seller notes, other standby debt and minority investors together can make up no more than half of the required injection. The rest has to be your own money, such as cash or a personal loan repaid outside the business.
• Valuation for every deal: an independent business valuation, ordered by the lender, is required for every change of ownership regardless of loan size. The valuation also caps the total debt that can support the purchase.
• Quality of earnings: required when the purchase price is $3 million or more (excluding owner-occupied real estate).
• Seller exit: in an Initial Acquisition the seller must fully exit, but can stay on as a paid consultant for up to 24 months (up from 12).
• Term: the non-real-estate part of a change-of-ownership loan cannot amortize over more than 10 years.
• No 7(a) small loans for acquisitions: the streamlined 7(a) small program (up to $350,000) is no longer available for changes of ownership, so every purchase goes through standard 7(a) underwriting.

Other SBA rules that affect buyers

• Citizenship: since March 1, 2026, every direct and indirect owner of a 7(a) or 504 borrower must be a U.S. citizen or U.S. national whose principal residence is in the U.S. Lawful permanent residents no longer qualify as owners. If a partner in your purchase holds a green card, raise it with the lender before you sign a letter of intent.
• Personal guarantees: owners of 20% or more must personally guarantee the loan.
• Rate caps on variable 7(a) loans: Prime + 6.5% up to $50,000; Prime + 6.0% from $50,001 to $250,000; Prime + 4.5% from $250,001 to $350,000; Prime + 3.0% above $350,000. Lenders can price below the cap.
• Upfront guaranty fee (fiscal year 2027): 2% of the guaranteed portion for loans of $150,000 or less, 3% from $150,001 to $700,000, and 3.5% above $700,000 (plus 3.75% on any guaranteed amount above $1 million).

Example: financing a $1 million business purchase

Here is how the numbers work on a $1,000,000 project (purchase price plus working capital and costs) financed with SBA 7(a):

Item	Amount
Minimum equity injection (10% of project cost)	$100,000, of which up to $50,000 could be a full-standby seller note
SBA 7(a) loan	$900,000
Maximum variable rate (Prime 7.00% + 3.0%)	10.00%
Monthly payment over 10 years at 10.00%	About $11,894 (about $142,700 a year)
Cash flow needed for 1.25x coverage	About $178,400 a year in EBITDA, before any other debt
Upfront SBA guaranty fee (3.5% of the 75% guaranteed portion)	About $23,625

Payment formula: payment = loan × r ÷ (1 − (1 + r)^(−n)), where r is the annual rate ÷ 12 and n is the number of months. At 9.00% the payment would be about $11,401 a month. Because variable SBA rates move with Prime, your payment can change. Many lenders also want room left over for a reasonable owner's salary, so a business that just clears 1.25x may still be a tight approval. To test other loan amounts, rates and terms, run them through our business funding calculator.

If the target business earns well under the coverage figure, the usual fixes are a lower price, a larger down payment, or more of the price paid through a standby seller note or other equity. For more on how lenders run this test, see our guide to the debt service coverage ratio (DSCR).

Bank loans, seller financing and other options

Conventional bank loans

Without an SBA guarantee, the bank carries all the risk. Expect a larger down payment (often 20% to 30%), more weight on collateral and your credit, a shorter term, and a preference for businesses with hard assets. A conventional loan can make sense if you would struggle with SBA rules, such as the citizenship requirement, and you have the cash and collateral. Our guide to business term loans covers how they are structured.

Seller financing

With seller financing, the seller "carries a note" for part of the price and you pay it over time. It reduces the cash you need at closing and shows the lender the seller believes in the business. Under SBA rules, a seller note counts toward your equity injection only if it is on full standby for the life of the SBA loan, and only up to half of the required 10%. A seller note that is paid during the loan is allowed, but it does not count as equity and its payments are included in the coverage test.

Earnouts

An earnout pays the seller more later if the business hits agreed targets. It can bridge a disagreement on price in a privately financed deal, but SBA does not allow earnouts in 7(a)-financed purchases, so plan the price structure accordingly.

Asset-based and equipment financing

If the business owns valuable equipment, vehicles, receivables or inventory, a separate equipment loan or asset-based line can fund part of the deal or the working capital after it. See our equipment financing guide.

Using retirement funds (ROBS)

A Rollover as Business Startup (ROBS) lets you invest eligible 401(k) or IRA money in your new company's stock through a new C corporation and its retirement plan, without an early-withdrawal tax. Buyers sometimes use it to fund the down payment. The IRS has flagged compliance problems with ROBS plans, so use a specialist and understand the ongoing plan obligations before you commit.

Buying into a business (partial purchase)

Buying a partner's share, or buying into an existing company, is treated differently from a full purchase. Under SOP 50 10 8.1 this is usually an "Owner Buyout," with its own rules: for example, a selling owner who keeps a stake must personally guarantee the loan for at least two years. Ask the lender early which category your deal falls into, because the down payment and coverage tests depend on it.

What lenders look at

• The target's cash flow. Two to three years of business tax returns and financial statements, plus a current year-to-date profit and loss statement and balance sheet. Lenders recast earnings to show what is left to service debt.
• The price. The independent valuation must support it. For small owner-run businesses, value is often a multiple of Seller's Discretionary Earnings (SDE); for larger ones, a multiple of EBITDA.
• You. Relevant industry or management experience, your credit history, a personal financial statement, a résumé, and proof of where your down payment comes from.
• The deal documents. A signed letter of intent or purchase agreement, the business plan for after closing, and how much working capital you will have on day one.
• Collateral. SBA lenders take available business assets, and on larger loans that are not fully secured they may also take a lien on personal real estate. A shortfall in collateral alone is not usually the deciding factor; cash flow is.

SDE vs. EBITDA: SDE starts with net profit and adds back one owner's salary and perks, interest, taxes, depreciation, amortization and one-time costs. EBITDA does not add back the owner's salary, because larger businesses pay a manager either way. Our business loan requirements guide lists the general documents most lenders request.

How to get a loan to buy a business, step by step

1. Check your own profile first. Know your credit, how much cash you can put in, and whether every owner meets SBA's citizenship rule.
2. Get the seller's numbers early. Ask for tax returns and financial statements before you agree on price, and run the coverage math yourself.
3. Sign a letter of intent with a financing contingency and a due diligence period long enough for SBA underwriting.
4. Submit the full package to a lender: buyer documents, business financials, the letter of intent, the business plan and projections for your own planning.
5. Underwriting and valuation. The lender orders the valuation (and a quality of earnings report at $3 million or more), verifies cash flow and reviews you.
6. Commitment letter. It sets the amount, rate, term, collateral and closing conditions.
7. Close. Attorneys finalize the purchase agreement, any seller note and the loan documents, and funds go to the seller.

SBA acquisition loans commonly take two to three months or more from application to closing, depending on the lender and how complete your package is.

Common questions

How hard is it to get a loan to buy a business?

It is easier than getting a startup loan, because the lender can underwrite years of real results. It is harder than it was before October 2026: the 1.25x coverage test on historical numbers, the mandatory valuation and the stricter seller-note rules mean the business must truly support the price.

Can I get a business acquisition loan with bad credit?

Possibly, but it is difficult. SBA sets no minimum credit score for standard 7(a) loans; each lender applies its own standards, and many prefer scores in the high 600s or better. A larger down payment, strong cash flow at the target, relevant experience and more seller financing can offset weaker credit. Unresolved defaults, recent bankruptcies or tax liens are much harder to overcome.

Can a business that is only about a year old get a loan to buy another business?

Yes, the lender will mostly underwrite the business being bought. But under SOP 50 10 8.1, the lighter "Business Expansion" rules (1.15x coverage, possible reduction of the 10% injection) require at least two full fiscal years under current ownership and the same four-digit NAICS industry group. A younger company, or one buying into a different industry (for example, a manufacturer buying an equipment rental business), is treated as an Initial Acquisition: 10% minimum injection and 1.25x coverage.

Which loan suits a $1 million purchase?

For most buyers, SBA 7(a): it allows 10% down and a 10-year term on goodwill. The worked example above shows the cash flow such a deal needs. A conventional bank loan can work if you have 20% to 30% to put down and strong collateral.

Can the loan include working capital?

Yes. SBA 7(a) loans can include working capital alongside the purchase price, and it is wise to build it in. Our guide to small business working capital explains how to size it. Remember that working capital raises the total project cost, and the 10% injection is calculated on that total.

Getting help with an acquisition loan

FSE is an independent commercial finance brokerage working with 50+ lending partners, including lenders that finance business purchases. One application lets us see which options may fit your deal before you spend weeks with a single lender. Our application asks for at least one year in business and $10,000+ in monthly revenue; for an acquisition, the target business's numbers matter most. Approval and terms depend on each lender. Start a no-obligation application.

Sources

• U.S. Small Business Administration, 7(a) terms, conditions and eligibility (loan maximums, rate caps, terms, guarantees)
• Womble Bond Dickinson, SOP 50 10 8.1 reshapes change-of-ownership lending (categories, 1.25x/1.15x coverage, equity, valuation, quality of earnings, 24-month consulting)
• Pioneer Capital Advisory, SOP 50 10 8.1 vs. 50 10 8 acquisition rules (seller-note standby, 10-year amortization, 7(a) small, earnouts)
• Compliance Alliance, SBA ownership, citizenship and residency requirements (effective March 1, 2026)
• NAGGL, SBA notices announcing FY2027 7(a) and 504 fees
• Federal Reserve, H.15 selected interest rates (bank prime loan rate, October 2026)
• IRS, Rollovers as Business Start-Ups compliance project

Rules and rates were checked in October 2026. SBA rules are applied by each lender and can change; confirm the details with your lender before you sign a purchase agreement.