So, you’ve found a small business under $5 million that you want to acquire. Now comes the fun part—figuring out how to finance it without draining your personal savings or selling an organ on the black market. When it comes to debt financing, two major options will likely be on your radar: SBA 7(a) loans and conventional bank loans. Both have their pros and cons, and your choice will depend on factors like risk tolerance, deal structure, and how comfortable you are signing a personal guarantee (spoiler alert: you’re going to have to sign one).
Let’s break it down.
Option 1: SBA 7(a) Loans—The Government-Backed Safety Net
SBA 7(a) loans are the most popular financing option for acquiring a small business, and for good reason. The Small Business Administration (SBA) guarantees a portion of the loan, which makes banks more willing to lend to small business buyers—even those without extensive industry experience or deep pockets.
Why SBA 7(a) Loans Work for Acquisitions
- Low Down Payment – Typically 10-15% down versus 20-30% for conventional loans.
- Longer Terms – Standard 10-year term (sometimes up to 25 years if real estate is included).
- Lower Interest Rates – While SBA loans carry a prime + margin structure (right now around 10.5-11.5%), they’re still often more favorable than some high-interest conventional loans.
- More Flexible Underwriting – The SBA encourages lenders to look at the entire deal, not just the buyer’s financials.
The Catch: SBA Loans Come With Strings Attached
- Personal Guarantee Required – If you own 20% or more of the business, you’ll be on the hook personally. That means if the business tanks, the lender can come after your personal assets.
- Collateral Grab – If the business doesn’t have enough assets to fully secure the loan, the SBA requires the lender to take a lien on your personal assets, including home equity.
- More Red Tape – The SBA process is slower and requires more paperwork, with detailed projections, business plans, and financial reviews.
Going Through a Bank vs. a Loan Broker
You can get an SBA loan in two ways: directly from a bank or through a loan broker (also called an SBA loan packager).
Going Straight to the Bank
If you already have a relationship with a bank, or you know of one that’s SBA Preferred, you might consider going directly.
However, not all banks are equally good at SBA lending. Some:
• Process SBA loans rarely and move at a snail’s pace.
• Have stricter credit and experience requirements despite the SBA backing.
• Are pickier about industries (some don’t like home services, others avoid food and beverage businesses).
Using a Loan Broker
A good SBA loan broker works with multiple banks and can match you with the one most likely to approve your deal quickly and with the best terms.
The best part? They’re paid by the bank, not you. Most lenders will pay brokers a 1% commission (or more) on the loan amount. That means their incentive is to get you funded—but also that some may steer you toward lenders that offer them higher payouts.
When a Loan Broker is Worth It
- If you don’t have an existing banking relationship or don’t know where to start.
- If you want more lending options to compare rates, terms, and speed.
- If your deal isn’t a slam dunk (e.g., industry is risky, financials are tricky).
When You Might Skip a Broker
- If you already have a bank that’s SBA savvy and willing to move quickly.
- If you want to cut out the middleman and negotiate directly.
Option 2: Conventional Bank Loans—For the Strong Borrower
If you can qualify, a conventional loan might be the better route. These loans aren’t backed by the SBA, so the bank is taking on all the risk. That means stricter underwriting, higher down payments, and shorter repayment terms, but potentially lower overall costs.
Why Conventional Loans Can Be Better
- No SBA Fees – SBA loans have guarantee fees (around 2.75% on larger loans). Conventional loans don’t.
- Faster Processing – No SBA bureaucracy means quicker closing.
- More Flexible Collateral Rules – While you’ll still likely sign a personal guarantee, your personal assets might not be fully tied up.
The Downsides of Conventional Loans
- Higher Down Payment – Usually 20-30% required.
- Shorter Terms – Instead of 10 years, many conventional loans have 5-7 year terms.
- Tougher to Qualify – You typically need strong financials, industry experience, and significant collateral.
The Personal Guarantee: No Escape
No matter which option you choose, expect to sign a personal guarantee. Banks and the SBA want skin in the game—meaning if the business fails, they’re coming after you first.
But there’s a difference:
• SBA Loans – If there’s a shortfall after liquidating business assets, the bank can go after your personal assets, home equity, or savings.
• Conventional Loans – Same thing, but with fewer restrictions on negotiation (some banks might allow partial guarantees).
If you’re buying a business and plan to sign a lease, you might be double-guaranteeing yourself. Many landlords also require a personal guarantee, so even if your loan is paid, you could still owe rent if things go south.
So, Which Loan is Right for Your Acquisition?
- If you want the lowest down payment and longest terms, SBA is the way to go.
- If you have strong financials and can afford a bigger down payment, conventional might be cheaper.
- If you don’t want to do the lender hunting yourself, an SBA loan broker can help.
- If you already have a strong bank relationship, go direct.
The reality? Most small business buyers use SBA 7(a) loans because of the lower equity requirement and easier qualification process. But if you’re in a strong financial position (or hate SBA paperwork), a conventional loan might save you money in the long run.
Either way, be ready to sign on the dotted line—and hope your business is worth the risk.
Final Thoughts
The biggest mistake you can make? Not shopping around. Talk to multiple lenders, brokers, and fellow business buyers before committing. Your debt structure can make or break your deal, so get it right from the start.
And if all else fails? Maybe start hoarding cash now—because the only loan with zero personal guarantee is the one you don’t take.
