Total project cost, the equity injection, pre-closing spend and a reserve, with the one seller note structure that actually reduces the buyer's cheque.
To buy a business with an SBA 7(a) loan you need cash for the equity injection, measured on the whole project and not on the price, plus what you spend before closing and a reserve after it. On a 1,800,000 business with 2,020,000 of total project cost, the 10 per cent injection is 202,000; with 35,000 of diligence and three months of debt service in reserve, the buyer needs 310,594, or 17.3 per cent of the price. A seller note on full standby can supply half the injection and cut that to 209,594.
Worked in full in Buying a Small Business by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The usual rule of thumb, "10 per cent down", is wrong twice: the injection is set on total project costs, and the cash that leaves the buyer's account is more than the injection. Both are worth working through before an offer is signed, because the bank will.
| Input | Value |
|---|---|
| Purchase price | 1,800,000 |
| Working capital funded at closing | 150,000 |
| Closing costs and fees, including the guaranty fee | 70,000 |
| Total project cost | 2,020,000 |
| Minimum equity injection, on total project cost | 10% |
| SBA loan rate, fixed for illustration | 10.5% |
| SBA loan term (business acquisition) | 10 years |
| Diligence paid before closing (quality of earnings, legal) | 35,000 |
| Post-closing cash reserve | 3 months of debt service |
The injection terms here are illustrative and follow the SBA's SOP 50 10 8 as issued in 2025: an equity injection of at least 10 per cent of total project costs on a complete change of ownership, with a seller note counting for up to half of it only if it is on full standby, no principal or interest payments, for the life of the SBA loan. The SBA revises the SOP and issues technical updates, and lenders can ask for more, so check the version and the lender's credit policy in force when you close.
Step 1: total project cost. Everything the loan and the injection together must pay for: the price, the working capital the business needs on day one, and the fees.
Total project cost = 1,800,000 + 150,000 + 70,000 = 2,020,000
Step 2: the injection and the loan.
Injection = 10% × 2,020,000 = 202,000; SBA loan = 2,020,000 − 202,000 = 1,818,000
Monthly payment, in Excel: =PMT(10.5%/12, 120, -1818000) = 24,531, or 294,374 a year.
Step 3: the cash that leaves the buyer's account. Add the diligence spent before closing (some lenders credit documented pre-closing costs to the injection; assume they do not until the term sheet says so) and a reserve of three months of payments, 73,594. The business can have a slow first quarter; the loan cannot.
Cash needed = 202,000 + 35,000 + 73,594 = 310,594
| Structure | SBA loan | Buyer injection | Monthly debt service | Buyer's cash | % of price |
|---|---|---|---|---|---|
| A. All injection from the buyer | 1,818,000 | 202,000 | 24,531 | 310,594 | 17.3% |
| B. 101,000 seller note on full standby | 1,818,000 | 101,000 | 24,531 | 209,594 | 11.6% |
| C. 180,000 seller note, paid over 5 years | 1,638,000 | 202,000 | 25,582 | 313,747 | 17.4% |
Structure B is the only one that saves the buyer cash. The standby note replaces 101,000 of the injection, and the SBA loan is unchanged because the injection still totals 202,000. Structure C looks generous, a 180,000 note at 6.0 per cent, but a note that is paid from day one does not count toward the injection. It replaces part of the bank loan instead (1,638,000 at 22,102 a month), adds its own 3,480 a month, and leaves the buyer writing a slightly larger cheque.
The seller pays for B in patience: no payments on the note for ten years, even if interest is allowed to accrue. That is why a seller may ask for a higher rate on a standby note, and why its cash value to the seller is lower than its face; see what a seller-financed price is worth in cash.
| Price | Total project cost | Injection | Cash, all from buyer | % of price | Cash, with standby note | % of price |
|---|---|---|---|---|---|---|
| 1,200,000 | 1,346,667 | 134,667 | 218,729 | 18.2% | 151,396 | 12.6% |
| 1,800,000 | 2,020,000 | 202,000 | 310,594 | 17.3% | 209,594 | 11.6% |
| 2,400,000 | 2,693,333 | 269,333 | 402,458 | 16.8% | 267,791 | 11.2% |
The fixed diligence bill makes small deals more cash-hungry in percentage terms. Across the range, the buyer should plan on roughly 17 to 18 per cent of the price without a standby note and 11 to 13 per cent with one.
Taking 10 per cent of the price: 180,000. That is 22,000 short of the injection the lender will ask for, before a cent of diligence or reserve. Buyers who discover this at the commitment letter usually close the gap by raising the seller note or cutting the working capital, and the second is the dangerous one: the reserve and the working capital are what carry the first year, when the business has a new owner and the loan has no grace.
The cash is only half the test. The same loan has to be covered by the business's own earnings, which sets the price ceiling: what purchase price a 1.25x DSCR supports on an SBA loan works that side.
Build total project cost first, take the injection on it, then add pre-closing spend and a reserve: 310,594 on a 1,800,000 business, or 209,594 if the seller agrees to a full-standby note for half the injection. The free workbook for this book carries sources and uses for a full SBA acquisition, and the small business acquisition model takes your own figures.
Under SOP 50 10 8 as issued in 2025, a seller note can supply up to half of the required injection if it is on full standby, with no payments, for the life of the SBA loan; check the version in force. In the illustrative case a 101,000 standby note cuts the buyer's cash from 310,594 to 209,594. A note paid from day one does not count; it only replaces part of the bank loan.
No. On a complete change of ownership the SOP sets it at a minimum of 10 per cent of total project costs, which include working capital and closing costs. On a 1,800,000 price with 220,000 of working capital and fees, that is 202,000, not 180,000. The lender may also require more, and the buyer still needs cash for diligence and a reserve.
There is no single rule, but a common prudent cushion is a few months of debt service held outside the business. At 24,531 a month on a 1,818,000 SBA loan at an illustrative 10.5 per cent over ten years, three months is 73,594, which is the largest item after the injection itself.
This article is one calculation from Buying a Small Business. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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