Most business purchases are financed by an SBA 7(a) lender in the US or a bank using the Canada Small Business Financing Program in Canada, often with the seller carrying part of the price. Lenders underwrite the business you are buying first and you second: they want proof the seller's cash flow covers the new debt, a buyer who can run the company, and a down payment that shows you have real money at stake.
Who says yes and who does not
Acquisition lending is a specialty. A lender that is happy to give an established company a line of credit may still decline a purchase, because the borrower does not exist yet in the form they will lend to. Here is how each lender type tends to respond.
| Lender type | Typical answer on an acquisition | Why |
|---|---|---|
| SBA lender | Yes, for most deals under the program limit | The government guarantee covers part of the loss, so they accept goodwill and longer terms |
| Bank (conventional) | Yes for larger, asset heavy deals with strong buyers | They need hard collateral and a bigger down payment without a guarantee |
| Credit union | Sometimes, often through SBA | Many are active SBA lenders in their region; fewer do conventional acquisitions |
| CDFI | Yes for smaller deals and first time buyers | Mission lenders who accept thinner collateral and pair loans with advising |
| Online lender | Rarely | Their models score an existing business's bank deposits, which the buyer does not have yet |
| Revenue based funder | No | Short terms and daily or weekly payments do not fit a purchase price |
Start with SBA lenders and banks, then look at CDFIs if the deal is small or you are buying your first company. If the sale includes the building, a commercial real estate lender or an SBA 504 structure may finance the property while the 7(a) loan covers the business.
How lenders underwrite the deal
The lender is buying into the same forecast you are. They rebuild the seller's numbers from tax returns, not from the listing memo, and test whether that cash flow supports your loan.
Cash flow of the target. Underwriters start with three years of business tax returns and year to date financial statements. They add back the owner's salary and one time expenses, subtract a fair wage for the new owner, and compare what is left to the annual debt payments. A debt service coverage ratio comfortably above 1.25 is the common floor. Add backs the seller cannot document are thrown out.
Your experience. Lenders want to see that you have managed people, a budget or a business in the same or a close industry. A strong resume can carry a deal with weaker collateral. A buyer with no related experience usually needs a transition plan, such as the seller staying on for several months, or a key manager who stays with the company.
Equity injection. Expect to put in at least 10 percent of the total project cost in cash under SBA rules, and more with a conventional bank. A seller note can count toward part of that injection when it is on full standby, meaning the seller receives no payments for a set period. The lender will trace where your down payment came from.
Purchase price and valuation. If the price is well above what the cash flow supports, the lender will ask for an independent business valuation. SBA lenders require one when the goodwill portion exceeds a set threshold. Overpaying is the most common reason a good buyer is declined.
Collateral and guarantees. Every owner with 20 percent or more signs a personal guarantee. SBA lenders take the business assets and often a lien on your home if there is equity in it, but they will not decline a sound deal for lack of collateral alone. Conventional banks will.
Structures that get deals approved
Most approved acquisitions combine several sources rather than relying on one loan.
- Senior loan. An SBA 7(a) loan with a term up to 10 years for the business, or up to 25 years when real estate is included. In Canada, the Canada Small Business Financing Program covers equipment, leaseholds and real property for a purchase, and banks pair it with their own term lending for goodwill. Read more on business acquisition loans and SBA 7(a).
- Seller financing. A note from the seller, often 10 to 20 percent of the price, shows the lender the seller believes in the business. It also keeps the seller invested in a smooth handover.
- Buyer equity. Cash, retirement rollover structures in the US, or investor money. Lenders look closely at outside investors because anyone with 20 percent or more becomes a guarantor.
- Earnouts. Part of the price paid later if the business hits targets. Lenders like earnouts because they lower the amount financed up front, though SBA rules limit how they are used.
What to prepare before you apply
A complete package moves a deal to approval in weeks instead of months. Gather these before your first call.
- Signed letter of intent or purchase agreement with price, terms and what assets are included
- Three years of the seller's business tax returns and year to date profit and loss and balance sheet
- A list of add backs with documentation for each one
- Your resume, focused on management and industry experience
- Personal financial statement and three years of personal tax returns for every buyer
- Proof of your down payment, with two to three months of statements showing where it sits
- A short business plan covering the transition, staffing, and any changes you will make
- A projection for the first two years under your ownership
- Lease details or a letter from the landlord confirming the lease can be assigned
- Any seller note terms, earnout terms and a non compete agreement
The order to approach lenders
Approach lenders in the sequence that matches your deal size and profile, and avoid sending the same file to many lenders at once. Each credit pull and each declined file follows you.
- Get the seller's numbers first. Before you approach anyone, confirm the tax returns support the price. If they do not, renegotiate before you apply.
- Talk to two or three SBA lenders that do acquisitions often. Ask how many purchases they closed last year in your industry. Preferred lenders can approve in house, which shortens the timeline.
- Add a conventional bank for larger deals. If the purchase is large, asset heavy, or you have a big down payment, a conventional loan may offer fewer fees and simpler terms. In Canada, start with banks that use the federal program, then compare with the Business Development Bank of Canada.
- Bring in a CDFI or credit union for smaller deals. For purchases where you are a first time owner or collateral is thin, a credit union or CDFI may say yes when a bank will not.
- Negotiate seller financing in parallel. Once a lender signals interest, you know how much seller paper the deal needs. Settle that term with the seller before the lender issues a commitment.
- Close with one lender and one plan. Pick the lender with the clearest path to closing, not only the lowest payment. A deal that closes on time protects your purchase agreement.
If the business sits in a state with a busy acquisition market, browse lenders by place, such as California, Texas or Ontario, to find officers who close purchases locally.
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