The SBA Loan Down Payment To Buy A Business

The 10% Rule

SBA calls a business purchase a "change of ownership," and it sorts them into types. If you are buying a business you do not already own, it is an Initial Acquisition, and the rule is simple: a Down Payment of at least 10%, and it "cannot be reduced or eliminated." No lender can waive it, no matter how strong your credit or the business is.

Three details catch buyers off guard:

• It is 10% of the total project, not the price. The total project is every cost needed to close and operate, whatever the source of the money: the price, working capital, closing costs and the guaranty fee you finance. Lines of credit and 504 loans are left out of the total.
• Real estate counts too. If the building is part of the deal, it carries the same 10%. When the business and the building are split into two loans, the Down Payment is split between them pro rata, unless the building goes through the SBA 504 program, which has its own rules.
• Paying more than the valuation costs extra. The independent valuation has to support the business purchase price. If you agree to pay more, you make up the difference with additional Down Payment.

Unlimited Sources: What Can Cover All Of It

SBA lists four sources that can cover the entire Down Payment:

1. Cash that is not borrowed. Your savings, proceeds from selling investments or property, and a gift from family. See gift funds for a Down Payment.
2. A personal loan to a guarantor, if you can show it will be repaid from a source other than the business's cash flow. The salary the business pays you does not count. A HELOC repaid from a spouse's income is the classic case; see using home equity for a Down Payment.
3. Grants with no repayment, clawback or other condition that could require them to be paid back during the loan.
4. Verified prepaid expenses, backed by paid invoices, canceled checks or bank statements. Fees for education, advisory services or an agent do not count.

Retirement money also lands in this group. A taxable 401(k) withdrawal becomes your cash, and a ROBS plan is a structure SBA specifically allows. See using a ROBS 401(k) to buy a business.

One more source is easy to miss. Money you spend on the financial due diligence reports SBA requires, such as the business valuation and a Quality of Earnings report, counts toward your Down Payment.

Limited Sources: Half At Most

Three sources can help, but together they can cover no more than half of the required Down Payment:

• Seller debt on full standby, meaning no payments of principal or interest for the life of the SBA loan. See seller notes on full standby.
• Other standby debt, on the same full standby terms, from a lender who takes no ownership in the business.
• Non-controlling minority equity, from investors who own less than 20% and have no control. Their investment cannot be repaid before the SBA guaranty is released, and they can only receive distributions to cover their taxes on the business's income until the loan is paid off. See investors for your Down Payment.

So on a first purchase, at least 5% of the project has to come from unlimited sources. That is why "no money down" SBA acquisitions do not exist, and why buying with 5% down is the floor.

There is one exception to the half limit. When the price is above what the valuation and Quality of Earnings support, additional limited-source money can fill that gap, but it must be on full standby.

Example: Building A Down Payment From Several Sources

The unlimited sources come to $80,000, more than the $66,000 minimum. The standby note is $52,000, under the $66,000 cap. Both tests pass.

How Other Purchase Types Compare

The 10% is fixed for an Initial Acquisition. Other kinds of changes of ownership get more flexibility:

When a lender waives the Down Payment on an Expansion or Owner Buyout, the business cannot have a negative net worth at its last fiscal year-end, and no dedicated permanent working capital can go into a 7(a) term loan within 90 days. See add-on acquisitions and the partner buyout loan page.

How The Lender Verifies It

SBA requires the lender to verify the Down Payment before any loan money is disbursed. For cash, that means:

• A copy of the check or wire, with proof it went into the business's account or escrow
• Your most recent account statement, covering at least 30 days, showing the money was there
• A statement or settlement statement showing the money was deposited or used in the deal

A gift letter, promissory note or financial statement on its own is not enough. Each needs that bank-level paper trail behind it. If any of the Down Payment is borrowed, such as a HELOC, the lender must also document the repayment terms.

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

Your Down Payment plan is one of the first things we work out in a pre-qualification letter. For the full loan picture, see SBA business acquisition loans.