For many small business acquisitions, the question isn’t whether the buyer can run the acquired company, it’s how they will pay for it.

While some transactions are funded entirely with cash, most require outside financing. The right financing strategy depends on the buyer’s financial position, the nature of the business being acquired, and the goals of both parties. Understanding the available options is critical to getting a deal done on time and on terms.

In previous articles, I walked through the M&A due diligence process and the legal deal structure strategies (asset vs. equity sales) that can impact purchase price, tax consequences, and buyer risk. In this post, I’m focusing on the small business financing side of deal structure: the options for funding a small business acquisition and how the mix of loans, equity, and seller financing can ultimately influence how the transaction is structured and closed.

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Why Financing Strategy Matters

Financing is more than just “coming up with the money.” The financing structure you choose can:

• Influence the purchase price and terms the seller is willing to accept
• Affect cash flow and operational flexibility post-closing
• Determine how quickly you can close, based on underwriting timelines and requirements
• Impact the level of personal or business risk in the deal

A well-matched financing plan aligns with your strategic goals, meets lender requirements, and preserves enough working capital to operate and grow the business after closing.

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The Common Building Blocks

Most small business acquisitions are funded with a combination of debt (bank loans, Small Business Association (SBA) loans, seller notes) and equity (buyer’s own capital or investor funds). Below are some of the most common options in today’s market.

1. SBA 7(a) Loans

For many small business transactions, the SBA 7(a) program is the most accessible and cost-effective source of acquisition financing.

Key features:

• Loan amounts up to $5 million
• SBA guarantees of 75% or 85% depending on loan amount, reducing lender risk
• Competitive interest rates and term length, often 7–10 years for business acquisitions
• Can be used to finance goodwill, equipment, working capital, and closing costs

What to expect:

• A detailed application process, including personal and business financials, tax returns, and a business plan
• Buyer equity injection requirements (at least 10% of the total project cost)
• Collateral and personal guarantees from all owners with more than 20% equity ownership
• Lender and SBA underwriting timelines (can be 60-90 days from application to funding depending on deal complexity)
• A 2-4% fee for the SBA guarantee based on loan amount

SBA loans work best when the buyer has strong personal credit, relevant management experience, and a target business with stable cash flow that can support debt service.

SBA also has the 504-loan program for major fixed assets like real estate and long-term equipment. The structure is similar to the 7(a) program, though it offers longer-term-length loans. 

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2. Conventional Bank Loans

If the buyer (or the business) has a strong balance sheet and collateral, a conventional loan from a bank may be an option. These loans may offer more flexibility on structure, but without an SBA guarantee, lenders will typically require stronger financial ratios and may shorten repayment terms.

Considerations:

• Faster underwriting than SBA loans in some cases
• May require higher down payments
• Often secured by business and/or personal assets
• Best suited for buyers with strong credit, substantial equity, or existing banking relationships
• Will still require personal guarantees from owners

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3. Seller Financing

In many small business acquisitions, the seller finances part of the purchase price through a promissory note payable over time. This can be combined with SBA or conventional financing to fill a gap between the down payment and the bank’s maximum loan amount.

Benefits:

• Often reduces the buyer’s closing cash requirement
• Demonstrates the seller’s confidence in the business’s ongoing performance
• Can be negotiated flexibly to meet both parties’ needs

SBA rule caveat: If using SBA financing, seller notes may need to be on full standby (no principal or interest payments) and subordinated to the prime debt for a specified period to count toward the equity injection.

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4. Earnouts and Contingent Payments

An earnout ties part of the purchase price to the business’s future performance. This structure can help bridge a valuation gap when the buyer and seller have different views of the company’s outlook. Or if the primary value of the business is goodwill and short-term or no-contract customer relationships.

Example: A buyer pays 70% of the purchase price at closing and agrees to pay the remaining 30% over three years, contingent on hitting agreed revenue or profit targets.

Watch out: Earn-out structure can lead to future disputes. Clear drafting is imperative for interpretation and dispute resolution. 

This structure often works best when the seller remains involved post-closing. Earn-outs can complicate or obsolete SBA financing. 

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5. Asset-Based Lending

In some deals, financing can be secured directly by the target company’s assets—such as receivables, inventory, or equipment. While typically more expensive than conventional bank or SBA loans, asset-based lending may be an option for transactions where cash flow is less predictable but tangible assets are significant.

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6. Investor Capital

Private investors may provide capital funding in exchange for equity or a combination of equity and debt. This option can bring industry expertise and additional growth capital but also means sharing ownership and control.

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7. Joint Ventures

While not a traditional financing tool, a joint venture with another operating buyer can sometimes be a practical way to acquire control of a business while reducing the upfront cash requirement. The challenge is finding the right partner. 

Many joint ventures end up creating more friction than value, and sharing ownership means you may not always have the final say on key decisions. That said, when two businesses are truly aligned and complementary, the combined capital and management expertise can create opportunities and long-term value that would be difficult to achieve alone.

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Choosing the Right Mix

In practice, many deals layer multiple financing sources. A common small business acquisition stack might look like:

• SBA 7(a) loan for 70% of the purchase price
• Buyer cash equity for 10%
• Seller financing for the remaining 20%

The right mix depends on:

• The size and type of the business being acquired
• The buyer’s financial profile
• The seller’s flexibility
• Lender underwriting requirements

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Practical Tips for a Smooth Financing Process

1. Engage your lender early. Preferably in conjunction with or even before signing the Letter of Intent (LOI), get a sense of loan feasibility and potential structure.
2. Know the SBA rules (you can find information on the SBA’s website here).
3. Prepare complete financials for both personal and business; missing documents can delay underwriting.
4. Financing contingencies and SBA approvals can take longer than expected; align your purchase agreement timelines accordingly.
5. Coordinate with your advisory team. Your attorney, accountant, and lender should be in sync to address issues as they arise.

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Final Thought

Financing is part of the deal’s overall strategy. The right structure balances cost, flexibility, and risk, while leaving the business with the resources it needs to thrive post-closing.

Working closely with an experienced lender early in the process — especially one familiar with SBA requirements and small business transactions — can make the difference between a deal that closes smoothly and one that stalls. 

If you’re exploring a sale or acquisition and want to speak with trusted lenders who specialize in small business M&A, I can help point you in the right direction. I’ve built strong relationships in the business banking community and am always happy to make introductions to professionals who can turn financing into a strength rather than a stumbling block. Contact me, and we can find a time to discuss your specific situation.