A 7(a) loan that finances buying an existing business or an owner's share of it. SBA requires an independent valuation, 10 percent equity and, for a new owner, debt service coverage of 1.25 to 1.
Appendix 15 sorts these loans into four types. An Initial Acquisition puts a new majority or largest owner in place and is the default. A Business Expansion is an established business buying another in the same four-digit industry group. An Owner Buyout changes the ownership of the borrower itself. An ESOP or cooperative purchase buys 51 percent or more of the employer business.
The debt service coverage floor is 1.25 to 1 for an Initial Acquisition, an Owner Buyout and an ESOP or cooperative, and 1.15 for a Business Expansion, with 1 to 1 on a global basis. The minimum equity is 10 percent of total project cost. A valuation from an accredited independent source is required, which the lender may do itself at a Business Purchase Price of $350,000 or less. At $3 million or more, an Initial Acquisition or Expansion also needs a quality of earnings report.
Seller earnouts are not allowed, the seller may stay on only as a consultant for up to 24 months, and the business portion amortizes over no more than 10 years. Example: a project cost of $1,000,000 with $100,000 of equity leaves a $900,000 loan. At a 75 percent guaranty the guaranteed portion is $675,000.
How it shows up in the data here
The SBA file's BusinessAge field separates change of ownership and start-up loans from established ones. This site carries each lender's count as change_of_ownership_n in its API record, and the lender search can filter on the share of a lender's 7(a) loans that were business purchases. The file shows no purchase price, valuation or seller role.
Go further
- Lenders with a quarter of 7(a) loans in business purchases: Lenders with 10 or more 7(a) loans in the window.
- Loan Comps for a 7(a) business purchase
- SBA 7(a) loan package checklist: A 7(a) package is the bank's usual file plus SBA's own list. Know which items SBA requires and you can have them ready before the first call.
- SBA 7(a) or 504: which fits your loan: Both are SBA loans, and they work differently. The choice usually turns on what you are buying and how much cash you can put in.
Related terms
- Equity injection (SBA): The cash or other equity an owner puts into an SBA-financed project. A 7(a) start-up or business purchase needs at least 10 percent of total project cost; a 504 project needs 10, 15 or 20 percent.
- SBA 7(a) loan: SBA's main business loan program. A lender makes the loan and SBA guarantees part of it: up to 85 percent of $150,000 or less and 75 percent of more, on loans up to $5,000,000.
- Credit elsewhere test (SBA): SBA's rule that a loan is eligible only if the business cannot get some or all of the money on reasonable terms elsewhere. The lender must certify it and explain why in its credit memo.
- SBA collateral requirements (7(a)): SBA's rules for what a 7(a) lender must take as collateral and how each asset counts, such as improved real estate at 85 percent of value. A request must not be declined only for thin collateral.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.