The SBA has reduced buyer equity requirements to just 10%. This means banks can provide up to 90% of the funding a borrower needs to purchase a business. Therefore, a qualified borrower would only need to provide 10% of the loan amount in the form of cash or a seller note. Of that 10%, 5% needs to come directly from the buyer (in order to make sure they have some skin in the game.) However, the other 5% can be derived from the seller note. So, by combining a seller note with an SBA 7(a) loan, buyers can now achieve up to 95% of the financing they need to purchase a business.

The Small Business Administration (SBA) loan program offers several advantages to borrowers looking to purchase part of a business. The SBA guarantees loans to business owners to help reduce the risk banks take when lending to small businesses. This means that banks are more willing to offer these loan products to high-risk borrowers. Additionally, the SBA's new rules allow business acquisitions to be financed up to 90% by a lender, and a seller note can be used to finance up to 5% of the purchase price of a business. This means that borrowers can purchase a business with as little as 5% down.

SBA small business loans are also great for addressing cash flow problems, payroll, and commercial real estate expenses.

The main disadvantage of using an SBA loan to purchase part of a business is that earn-outs are prohibited under SBA rules. Earn-outs involve the seller of a business staying with it for a prearranged period, usually a few years, during which they will receive additional payments based on the financial performance of the company. This could lead to conflicts that undermine the stability of the business.

Other disadvantages of SBA 7(a) loans include lengthy approval times (for standard SBA 7(a) loans), lots of documentation, collateral is often required, certain businesses, including real estate investing, lending, gambling, and speculation are prohibited, high credit scores are typically required (typically 680+), and there may be restrictions on supplemental/additional financing.

In order to qualify for an SBA loan to purchase part of a business, you must meet the following criteria:

• A credit score of at least 690
• A record free of any bankruptcies in the past three years
• At least a 10% down payment
• For franchisees, a paid franchise fee before the loan funds are released
• A clean criminal history, or the ability to explain any misdemeanors on your record
• No current Federal debt
• Industry or managerial experience (to prove you’re qualified to run the business you want to buy)
• A for-profit entity
• A small business by definition
• Based in the United States
• A business with invested equity
• A business that has exhausted its other financing options
• A good credit score - preferably above 680
• A history free from recent bankruptcies, foreclosures, or tax liens
• Having been in business for at least two years
• The ability to provide collateral for loan requests over $25,000
• The ability to make a down payment of 10% if your intended use of funds is to purchase a business, commercial real estate, or business-related equipment
• Sufficient cash flow to meet your debt obligations
• Sufficient working capital (once you subtract liabilities from assets)
• “Good character” according to the SBA (partially decided based on your track record of managing your resources and day-to-day business affairs)

Source: www.sba7a.loans/use-the-sba-7a-loan-to-buy-a-business and www.sba7a.loans/eligibility-and-qualifications-for-the-sba-7a-loan

To apply for an SBA loan to purchase part of a business, you will need to provide the following documents:

• Agreement to purchase the business
• Letter of intent to buy the business
• Business tax returns for the past three years
• Any outstanding business debt
• Long-term business contracts
• Documentation of business assets
• Business lease agreement
• Incorporation documents and/or business license
• Business plan
• SBA Form 1919 (borrower information form)
• SBA Form 912 (statement of personal history)
• SBA Form 413 (personal financial statement)
• Financial statements, including a balance sheet, profit and loss, and income projection

In addition, the SBA will usually order an independent business appraisal to give lenders an idea of what the true value of the business is.

The SBA allows applicants to get help (for example, from a lawyer or a translator) filling out the application paperwork, but your lender will be required to submit information about who gave you help to the SBA, so you’ll need to document who this person is as well.