SBA Loan Vs Conventional Loan Vs Seller Financing To Buy A Business

The Three Options In One Paragraph Each

SBA 7(a) loan. A bank or non-bank lender makes the loan and SBA guarantees most of it. Because of the guaranty, the lender can finance goodwill, the part of the price that is not hard assets, with a Down Payment of 10% of the project and a 10-year repayment. In exchange, you follow SBA's rules on valuation, cash flow, seller involvement and more.

Conventional loan. A bank lends its own money with no government guaranty, so it carries all the risk. Banks protect themselves with larger Down Payments, shorter terms and a focus on collateral they can sell. SBA's acquisition rules do not apply, so the bank sets every term itself.

Seller financing. The seller lets you pay part of the price over time under a promissory note. The terms are whatever the two of you negotiate. On its own, it rarely covers a whole purchase. Alongside an SBA loan, it is one of the most useful tools in the deal.

Side-By-Side Comparison

The conventional and seller columns describe typical market practice, not fixed rules. They vary a lot by lender, seller and deal.

When An SBA Loan Fits

An SBA loan is usually the best fit when:

• The business is profitable, with tax returns that show it
• Most of the price is goodwill, like a service company, agency, practice or route business
• You want to keep as much of your cash as possible
• You want a 10-year repayment that leaves the business room to breathe
• The seller is willing to carry a small note on full standby

There is also a built-in check. SBA lenders must certify that the loan is not available on reasonable terms without the SBA guaranty, and they must explain why in the credit memo. A longer term than the bank's policy allows, collateral that does not meet its standards, or a loan above its usual limit are all accepted reasons. For a goodwill-heavy acquisition, that test is almost always met. Read how SBA acquisition loans work for the full picture.

When A Conventional Loan Fits

A conventional loan can be the better choice when:

• The business owns a lot of hard assets, such as real estate, heavy equipment or inventory, that cover most of the loan
• You can put 25% or more down and want to avoid SBA's guaranty fee and paperwork
• You already bank with a lender that knows you and your industry
• You want terms SBA does not allow, such as the seller staying on as a minority owner or an earnout

The trade-off is usually the term. A five-year loan on the same amount means much bigger payments than a 10-year SBA loan, and the cash flow has to carry them. Also, if a deal meets a bank's conventional standards, it is not eligible for an SBA loan from that bank, because of the credit elsewhere test above.

When Seller Financing Fits

Seller financing alone tends to work for smaller purchases, for businesses whose books are hard to finance, and for transactions between people who already trust each other, such as an employee buying out a retiring owner.

The risks are real on both sides. The seller carries a large note and may insist on tight control rights if you miss a payment. You may face a balloon payment in a few years that you have to refinance. And because there is no independent valuation, nobody but you is checking that the price is fair.

How To Combine Them

Most of the deals we close use two of these together. The most common pairings:

SBA loan plus a standby seller note. A seller note on full standby, with no payments for the life of the SBA loan, can cover up to half of the 10% Down Payment. That cuts your cash in half. See seller notes on full standby.

SBA loan plus an amortizing seller note. A note repaid alongside the SBA loan can fill a gap between the price and the SBA loan. It does not count toward the Down Payment, its payments count in the 1.25 cash flow test, and the SBA loan plus that note cannot exceed the valuation. See seller financing with an SBA loan.

SBA loan plus a conventional loan. For purchases larger than one $5 million SBA loan can cover, a lender can pair the SBA loan with a conventional loan that shares the collateral equally, called pari passu. See SBA loans over $5 million.

Real loans we placed. Borrower and lender names are kept private. See all closed deals.

How To Decide

Start with the business, not the loan. If it is profitable on its tax returns and mostly goodwill, an SBA loan with a seller note is usually the place to begin. If it is asset-rich and you have a large Down Payment, get a conventional quote too. If the seller insists on financing the whole deal, ask why, and have your CPA and attorney review the note.

Then compare the full picture: cash at closing, the annual payments the business will carry, the balloon risk and the rules you will live under. A pre-qualification letter shows you what the SBA structure looks like for your deal before you decide, and the SBA business acquisition loan page covers the product in detail.