SBA 7(a) Loans for Buying a Business in Texas

What are SBA 7(a) loans for buying a business?

SBA 7(a) loans for buying a business are the most common way individual buyers finance the acquisition of an existing small business. The 7(a) program is the U.S. Small Business Administration's primary loan guarantee program. The SBA does not lend the money itself. Participating lenders, including banks, credit unions, and licensed nonbank lenders, make the loans, and the SBA guarantees a portion of each loan against loss. That guarantee is what allows lenders to finance business acquisitions on terms they might not offer on a conventional loan.

For a buyer in Texas, the program works the same way it does in every state. The practical difference is the lender: you will work with a lender active in Texas that understands the local market and has experience with acquisition loans. This article covers how the program is structured, what lenders underwrite, how seller notes are treated, and what a buyer should prepare.

How much can you borrow under the 7(a) program?

The maximum 7(a) loan amount is $5 million. That cap applies to the SBA loan itself; the total purchase can be larger if the rest is funded by buyer equity, seller financing, or other sources the lender accepts.

The amount a lender will actually approve depends on the business's documented cash flow, the buyer's equity, collateral, and the lender's own credit policy. The cap is a ceiling, not a target. Loan proceeds can typically cover the purchase price, working capital, and certain closing costs, subject to SBA rules and lender approval.

What is the equity injection, and where can it come from?

Buyers must make an equity injection, meaning they contribute their own money toward the purchase. The SBA sets minimum requirements for change of ownership transactions, and those minimums have changed over time, so confirm the current requirement with your lender rather than relying on a figure you read online. Many lenders also set their own requirements above the SBA minimum based on the risk of the deal.

Equity commonly comes from personal savings, the proceeds of selling other assets, documented gifts, or retirement funds used through a properly structured arrangement. Lenders will require you to document the source of the funds, typically with bank statements covering a period before closing. Borrowed money generally cannot be used as equity unless SBA rules and the lender permit it.

Who has to sign a personal guarantee?

SBA rules require a personal guarantee from every person who owns 20 percent or more of the borrowing business. A personal guarantee means the guarantor is personally responsible for repaying the loan if the business cannot. Lenders may require guarantees from other owners or from spouses in some circumstances, depending on how assets are held.

Buyers should understand the guarantee before signing a letter of intent. It is a significant personal commitment, and it is worth reviewing with your own attorney.

What do lenders underwrite in a business acquisition?

Lenders evaluate three main areas.

Debt service coverage from historical cash flow. The central question is whether the business's documented past cash flow covers the new loan payments, plus any other debt such as a seller note, with a margin of safety. Lenders build this figure from the business's tax returns and financial statements. They generally credit only add backs they can verify, which is why the seller's records matter as much as the buyer's. Our guide to seller's discretionary earnings explains how those add backs are built and tested.

Buyer experience. Lenders want evidence that the buyer can run the business. Direct industry experience is the strongest case. Management experience in a related field, a strong transition plan with the seller, and key employees who are staying can also support the application.

Collateral. SBA lenders take available business assets as collateral and may also take liens on personal assets, including real estate, when the business assets do not fully secure the loan. Under SBA rules, a lack of collateral alone is generally not a reason to decline an otherwise sound loan, but lenders are required to take available collateral.

Lenders commonly order an independent business valuation for an acquisition loan. That third party valuation helps the lender confirm the price is supported. A buyer can prepare by understanding how the business is likely to be valued; Forge's business valuation service provides a broker opinion of value, which is not a certified appraisal and does not replace the valuation a lender orders.

How do lenders treat seller notes?

A seller note is a loan from the seller to the buyer for part of the purchase price. Lenders often like to see one because it keeps the seller invested in a successful transition.

How a seller note fits into an SBA financed deal is governed by SBA rules. Those rules determine whether a seller note can count toward the buyer's required equity and, if so, under what conditions, such as limits on payments to the seller for a period after closing. These rules have changed several times in recent years. Confirm the current treatment with your lender before you agree on terms with a seller.

Whatever the equity treatment, a seller note in an SBA deal is subordinate to the lender's loan, and its payments are included in the lender's debt service coverage analysis if payments are allowed. Buyers and sellers should negotiate the note's terms with the lender's requirements in mind, not after the fact.

What documents should a buyer prepare?

Lenders ask for a large package. Having it ready shortens the back and forth. A typical package includes:

• A personal financial statement, often on SBA Form 413
• Personal federal tax returns for recent years
• A resume showing management and industry experience
• Documentation of the source of the equity injection
• The signed letter of intent or purchase agreement
• The target business's federal tax returns and financial statements for recent years, plus interim statements for the current year
• A business plan and projections showing how the buyer will operate the business and service the debt
• SBA borrower information forms required by the lender, such as SBA Form 1919
• Entity formation documents for the buying company, which in Texas are filed with the Secretary of State

Lenders will request more as underwriting proceeds, including a lease review, licenses, and insurance.

What does the seller need to provide?

An SBA acquisition loan depends on the seller's records as much as the buyer's. Lenders will ask the seller, through the buyer, for business tax returns for recent years, year end and interim financial statements, a list of the assets being sold, a copy of the lease, and details on any debt that will be paid off at closing. If the business holds licenses, permits, or franchise rights that must transfer or be reissued, the lender will want to see how that will happen.

Lenders also look closely at the seller's role after closing. A written transition plan that covers how long the seller will stay, what the seller will do, and how key customer and supplier relationships will be introduced supports the buyer's case that the business will keep performing. SBA rules limit how a seller may stay involved after a change of ownership, so confirm the plan with the lender.

Delays in SBA deals often come from the seller side: missing returns, books that do not reconcile, or a landlord who has not agreed to assign the lease. Buyers should raise these items at the letter of intent stage, before paying for third party reports.

How long does SBA financing take?

Timing depends on the lender. Lenders with delegated authority under the SBA's Preferred Lenders Program can make credit decisions without sending the file to the SBA for review, which can shorten the process. Other lenders submit the loan to the SBA for approval. Either way, the pace depends on how quickly the buyer and seller provide documents, how long the third party valuation and any appraisals take, and how complex the deal is.

Buyers should not commit to a closing date with a seller until the lender has reviewed the package and given a realistic schedule.

How should Texas buyers choose a lender?

Texas has a large market of SBA lenders, from national banks to community banks, credit unions, and nonbank lenders. Experience with acquisition loans matters more than size. Ask each lender how many change of ownership loans it closes, whether it has delegated authority, what its own equity and collateral requirements are, and how it treats seller notes under current SBA rules.

Working with a broker who understands lender requirements also helps. A Texas business broker can identify early whether a business's records will support SBA financing, which saves time for buyers and sellers alike. When you are ready to look at businesses, start with our buy a business page.

Is an SBA 7(a) loan right for your purchase?

For many individual buyers, a 7(a) loan is the practical way to acquire a business with a manageable equity contribution and a longer repayment term than conventional financing usually offers. It also comes with obligations: personal guarantees, collateral, detailed documentation, and lender review of the deal. Talk with lenders early, before you sign a letter of intent, so the terms you negotiate with a seller fit what can actually be financed.