Using SBA Loans for Business Acquisitions

by McNees Wallace & Nurick LLC

Loans guaranteed by the Small Business Administration (“SBA”) can be a valuable tool for buyers interested in acquiring businesses that do not have sufficient hard assets to meet the collateral requirements of traditional bank financing.  While the SBA itself does not provide the financing, the SBA guarantees a portion of the loan obtained from any bank offering SBA financing.  This SBA guaranty allows banks to provide financing that may be riskier and/or not typically offered via ordinary channels.

One of the SBA’s loan programs, the 7(a) loan program (the “Program”), allows loan proceeds to be used for general corporate purposes including:

  • To provide long-term working capital to use to pay operational expenses, accounts payable and/or to purchase inventory;
  • Short-term working capital needs, including seasonal financing, contract performance, construction financing and exporting;
  • To purchase equipment, machinery, furniture, fixtures, supplies or materials;
  • To purchase real estate, including land and buildings;
  • To construct a new building or renovate an existing building; and
  • To establish a new business or assist in the acquisition, operation or expansion of an existing business.

While there are many favorable benefits associated with using the Program for acquisitions, there are also specific requirements that must be met.  Moreover, the SBA approval process requires substantial paperwork and may have a longer approval process and waiting period than typical lending.  If you are planning on using the Program for an acquisition, understanding the requirements upfront and planning for them in your proposal will protect you against having to re-negotiate terms, sometimes very unfavorably, later in the acquisition process.

In order to use the Program to acquire a business, the buyer must be purchasing a currently operating for-profit business.  The potential target business must also be “small” (as defined by SBA guidelines) and be engaged in or doing business in the United States.  SBA financing cannot be used to purchase businesses with existing tax liens.  The Program can be used for either asset or stock/equity acquisitions, but 100% of the business must be purchased.  In addition, any business owner who will own more than 20% of the target business must sign a personal guarantee.

Many times an acquisition is structured with a portion of the purchase price payment paid as an earn-out for future performance of the target business.  When using SBA financing, an earn-out, and other types of post-closing payments, cannot be paid to the seller of the business.  Also, if the seller is providing financing to the buyer in the form of a seller note, the note must be subordinate to the SBA financing and no payment of principal or interest can be paid for two years after closing.  Further, the seller cannot remain as an officer, director, shareholder or key employee of the selling business.  Therefore, offering an employment agreement or other post-closing benefits is restricted.  If needed, the buyer can offer the seller a consulting agreement, but the term cannot exceed twelve months (including extensions).  The Program can be utilized to finance goodwill in an acquisition. However, if the transaction is valued over $500,000, the buyer and seller must provide an equity injection of at least 25% of the value of the transaction for the loan to be processed under delegated authority.  The injection can be in the form of cash or seller financing, subject to the restrictions regarding seller notes listed above.

If you are considering using the Program for an acquisition, having an understanding of the restrictions mentioned above will enable you to develop an initial proposal that accounts for both the pros and cons associated with SBA financing and will protect you from having to re-negotiate material terms later in the process.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McNees Wallace & Nurick LLC | Attorney Advertising

Written by:

McNees Wallace & Nurick LLC

McNees Wallace & Nurick LLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.