How SBA 7(a) down payments and equity injection work

Most people buying a small business finance it with an SBA 7(a) loan. It’s the standard tool for deals under about $5 million, and the reason is simple: it lets you buy a business with far less cash than a bank would normally require. But the rules around the down payment, what the SBA calls the equity injection, are where first-time buyers get confused and sometimes get stuck at the closing table.

Here’s how it actually works.

The 10% rule

For an SBA 7(a) business acquisition, the SBA requires a minimum equity injection of 10% of the total project cost. On a $650,000 purchase, that’s $65,000 you need to bring.

That 10% is a floor, not a ceiling. Individual lenders can require more if the deal looks risky to them, and many do. A bank might want 15% on a business with thin margins or heavy customer concentration. So “10% down” is the SBA’s minimum, but the lender you’re working with sets the real number, and it pays to ask early.

One thing that surprises people: the 10% is on the total project cost, not just the purchase price. If you’re borrowing for working capital or closing costs on top of the purchase, those roll into the project cost the injection is calculated against.

Where the money can come from

The equity injection has to be your money, or money you don’t have to repay on terms that compete with the SBA loan. Cash and savings are the obvious source. So is a gift from family, if it’s documented as a true gift and not a loan. A retirement account rollover can work through a specific structure. Home equity can count, though drawing on it adds a payment you’ll carry.

What can’t count, without care, is borrowed money. If you take a personal loan to cover the down payment, the SBA generally won’t let that count as your injection, because the point is that you have real skin in the game. A lender will ask for two or three months of bank statements to trace where the down payment came from, so it needs to be clean and documented.

The seller note trick

Here’s where it gets useful. A seller note, where the seller finances part of the price and you pay them back over time, can reduce the cash you need at closing. And under current SBA rules, a seller note can count toward part of your equity injection, but only under a specific condition: it has to be on full standby for the life of the loan, meaning the seller receives no payments, principal or interest, for the entire term.

That’s a big ask of a seller, so it doesn’t happen on every deal. But it’s the mechanism that lets a buyer with limited cash still get to closing. A seller note on standby can cover up to half of the required injection, meaning on that $65,000 example, a standby seller note might cover part of it and shrink the cash you personally need to bring.

This is worth understanding before you negotiate, because how the seller note is structured changes how much cash you need and whether the lender will approve the deal at all.

The numbers that decide approval

The down payment gets you in the door, but it’s not what gets the loan approved. Lenders care most about whether the business throws off enough cash to cover the loan payments with room to spare. That’s the debt service coverage ratio, or DSCR.

The SBA looks for a minimum DSCR around 1.15, meaning the business earns at least $1.15 for every $1 of debt payment. Most lenders want to see 1.25 or better before they’re comfortable. If the business earnings don’t clear that bar after your debt payments, no down payment size fixes it, the deal doesn’t finance as structured, and the price or the terms have to change.

What to work out before you make an offer

Before you commit to a business, you want to know three things: how much cash you’ll actually need at closing, whether a seller note is on the table to reduce it, and whether the business earns enough to clear the coverage the lender requires. Those three answers tell you whether the deal is real for you or a stretch you can’t finance.

Get them wrong and you find out at the closing table, which is the worst possible time. Get them right up front and you negotiate from a position of knowing exactly what you can afford.

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Valtize runs these numbers from a seller’s financials: the equity injection required, how a seller note changes it, and whether the debt service coverage clears the lender’s bar, so you know whether a deal finances before you make an offer. Try it.