How Much Money Do You Need to Buy a Business?
By Troy Frank, Owner — Indiana Equity Brokers
Estimated read time: 7 min
The short answer: For most Main Street acquisitions using an SBA 7(a) loan, you need a minimum 10% equity injection of total project cost — and the SBA allows up to half of that to come from a seller note on full standby. That means a buyer with 5% in cash plus a 5% standby seller note can meet the requirement. On a $1,000,000 business, that’s roughly $50,000 of your own money, not $250,000. You’ll also need cash on top for closing costs and working capital. Collateral matters less than most buyers assume; cash flow and your equity contribution matter far more.
The most common reason someone never buys a business is a number they made up.
Buyers tell me all the time that they’re waiting until they’ve saved 20% or 25% down. That figure comes from real estate, not from business acquisition, and it keeps qualified people on the sidelines for years. The actual requirement is usually a fraction of what they think.
Here’s what it really takes to buy a business in Indiana, where the money comes from, and what lenders care about instead of your personal net worth.
The 10% Rule — and the Half of It You Don’t Have to Fund
The SBA 7(a) program is how most Main Street acquisitions get financed in Indiana. Under the SBA’s current operating procedure, a change-of-ownership deal requires a minimum equity injection of 10% of total project cost.
The part buyers miss: up to half of that 10% can come from a seller note on full standby. Full standby means the seller receives no payments at all while the SBA loan is outstanding. The note accrues, and the seller gets paid after the bank does.
So the common structure is 5% buyer cash and 5% standby seller note. On a $1,000,000 purchase, that’s about $50,000 out of your pocket rather than $100,000 — and a long way from the $250,000 most buyers assume they need.
The equity has to be yours. Lenders verify it against bank statements and they want it seasoned, typically two to three months. A large deposit that appeared last week gets flagged as undisclosed borrowed money. A HELOC or personal loan generally does not count toward the injection, though gifts from family can, with the right documentation.
What You Need Beyond the Down Payment
This is where buyers get caught short, and it’s the part nobody budgets for.
Closing costs run a few percent of the deal — attorney fees, the SBA guaranty fee, lender fees, the third-party business valuation the bank will order, lien searches, and title work if real estate is involved.
Then there’s working capital. You need payroll covered before the first receivables come in, inventory to replace what you sell in month one, and a cushion for the transition period when a customer or two takes a wait-and-see approach to the new owner. Good news: SBA 7(a) can often finance working capital as part of the same loan, so ask your lender to build it in rather than draining your personal reserves.
The buyers who struggle in year one are almost never the ones who paid too much. They’re the ones who closed with nothing left in the bank.
Why Collateral Isn’t the Gatekeeper You Think
Most buyers assume they need a paid-off house to get approved. That’s not how business acquisition lending works.
For a 7(a) acquisition, the SBA does not require a lender to decline a loan solely because collateral is insufficient. If you’re otherwise a strong borrower, a collateral shortfall alone won’t sink you. The lender will take a lien on the business assets and, if you have meaningful equity in real estate, they’ll likely take that too — but the absence of it isn’t disqualifying.
What lenders actually underwrite:
Cash flow coverage. Can the business service the new debt with margin to spare? Lenders want to see the adjusted cash flow cover the annual loan payment comfortably. This is the number that decides your deal.
Your experience. Relevant management or industry background carries real weight. You don’t need to have run this exact business, but you need a credible story about why you can operate it.
Credit and character. Personal credit, a clean background, and no defaulted federal debt.
The quality of the business itself. Stable earnings history, reasonable customer diversity, and financials that reconcile to the tax returns. A weak business won’t get financed no matter how much collateral you pledge — which is why the red flags to watch for when buying a business matter as much to your lender as they do to you.
Be prepared for one non-negotiable: you’ll personally guarantee the loan. Every owner with 20% or more of the new entity signs.
Seller Financing Does More Than Fill a Gap
Seller notes are common in Main Street deals for a reason that has nothing to do with the buyer being short on cash.
A seller willing to carry paper is telling the bank something. They believe the business will still be generating cash in three years, because that’s when they’re getting paid. Lenders read that as a confidence signal, and so should you. A seller who refuses to carry any portion of the price, on a business they’ve described as stable and growing, is worth a follow-up question.
Terms vary widely. Notes commonly run three to seven years at rates negotiated between the parties. If the note counts toward your SBA equity injection, it must be on full standby for the life of the SBA loan — no payments at all — so make sure the seller understands that going in. A seller expecting monthly checks will be unhappy to learn otherwise at closing.
What This Looks Like on a Real Deal
Take a business selling for $1,000,000 with $250,000 of adjusted cash flow.
The SBA loan covers $900,000. The equity injection is $100,000 — but $50,000 of that can be a standby seller note, leaving $50,000 in buyer cash. Add roughly $30,000 to $40,000 for closing costs and fees, and ask the lender to finance working capital inside the loan.
So a buyer walks in with something in the range of $80,000 to $90,000 rather than a quarter million. On a ten-year term, the debt service on $900,000 lands well under the $250,000 of cash flow, leaving the new owner a salary and room for the unexpected.
Every deal is different and your lender’s terms will vary. But that’s the shape of it, and it’s a very different picture than most buyers carry around. For more on the loan side specifically, see our complete guide to SBA loans for business acquisition.
Frequently Asked Questions
How much money do you need to buy a business?
With SBA 7(a) financing, the minimum equity injection is 10% of total project cost, and up to half of that can be a seller note on full standby. A buyer can often close with about 5% of the purchase price in cash, plus closing costs and a working capital reserve. On a $1,000,000 business, that’s commonly $80,000 to $90,000 rather than $250,000.
Can I buy a business with no collateral?
Often, yes. The SBA does not require a lender to decline a 7(a) acquisition loan solely because collateral is insufficient. Lenders weigh the business’s cash flow coverage, your management experience, and your credit far more heavily than your personal assets. You will still need to make the required equity injection and personally guarantee the loan.
Does a seller note count toward my SBA down payment?
Yes, up to half of the required 10% equity injection, provided the note is on full standby for the life of the SBA loan. Full standby means the seller receives no principal or interest payments until the SBA loan is repaid. Make sure the seller understands this before terms are agreed.
Can I use a personal loan or HELOC for the equity injection?
Generally no. The SBA requires the equity injection to be the buyer’s own funds, and lenders verify the source against bank statements. Funds are expected to be seasoned, usually two to three months. Documented gifts from family members can qualify, but borrowed money typically does not.
How much cash flow does a business need to get an SBA loan?
Lenders want the business’s adjusted cash flow to cover the new annual debt service with a comfortable margin, and they will re-verify the seller’s numbers independently. Add-backs you can document survive underwriting; add-backs you can’t get removed, which reduces both the approved loan amount and the price the business can support.
How long does SBA financing take when buying a business?
Plan on 60 to 120 days from letter of intent to funding for an SBA 7(a) acquisition. The lender orders an independent business valuation and re-underwrites the seller’s financials, which adds time compared with a standard working capital loan.
The Number That Actually Matters Is the Cash Flow
If you’ve been waiting to save a down payment based on a figure you got from buying a house, you’ve probably been waiting longer than you needed to. Business acquisition lending is built around whether the business can pay for itself, not around what you own.
The useful next step isn’t more saving. It’s finding out what you’d actually qualify for and what’s available in your range. Indiana Equity Brokers has closed more than $808M in transactions across 880-plus businesses, and we work with buyers at every level of the market.
Take a look at the businesses we currently have for sale or register as a buyer through our buyer program.
Reach me directly at troy@indianaequitybrokers.com or visit indianaequitybrokers.com.
