For owner-operators looking to acquire a business, understanding acquisition financing is essential. Whether you're buying your first business, adding to an existing platform, or pursuing a roll-up strategy, knowing how lenders evaluate deals—and what financing options exist—can mean the difference between closing a transaction and walking away empty-handed.

What Is Acquisition Financing?

Acquisition financing is debt used specifically to purchase a business. Unlike working capital or equipment loans, acquisition debt is secured by the cash flow and assets of the target business. Lenders evaluate both the buyer's creditworthiness and the target business's ability to service debt.

SBA 7(a) Loans: The Gold Standard for Small Business Acquisitions

The SBA 7(a) loan program is the most common financing vehicle for small business acquisitions under $5M. The Small Business Administration guarantees a portion of the loan (typically 75–90%), reducing lender risk and enabling favorable terms for borrowers.

Key Terms of SBA 7(a) Loans:

• Loan amounts: Up to $5M
• Down payment: Typically 10% (seller note can cover part of this)
• Interest rates: Prime + 2.75% (variable) or fixed rates slightly higher
• Term: Up to 10 years for acquisitions
• Personal guarantee: Required from borrowers with 20%+ ownership

Pros of SBA Financing:

• High leverage (up to 90% LTV)
• Long amortization periods reduce monthly payments
• Competitive interest rates
• Seller notes can be used to cover part of the down payment

Cons of SBA Financing:

• Lengthy approval process (60–90 days)
• Extensive documentation requirements
• Personal guarantee and personal financial review required
• Strict eligibility requirements (business must be operating in the U.S., borrower must work full-time in the business, etc.)

Non-Bank Lenders: Speed and Flexibility

For larger acquisitions, faster closes, or borrowers who don't meet SBA requirements, non-bank lenders (also called alternative lenders or private debt funds) provide acquisition financing outside traditional banking channels.

Key Terms of Non-Bank Acquisition Debt:

• Loan amounts: $1M–$50M+
• Down payment: 20–40% equity
• Interest rates: 8–15% depending on risk profile
• Term: 3–7 years
• Speed: Can close in 2–4 weeks

When Non-Bank Lending Makes Sense:

• You need to close quickly (competitive auction, time-sensitive opportunity)
• The acquisition is above SBA loan limits
• The target business has unusual characteristics (asset-light, subscription-based, etc.)
• You're an existing operator with a track record and don't want to go through SBA's lengthy process

What Lenders Actually Evaluate

Lenders assess two primary areas: the target business's viability and the buyer's ability to operate it successfully.

Business Fundamentals:

• Cash flow consistency: 3+ years of stable or growing EBITDA
• Debt service coverage ratio (DSCR): Typically 1.25x minimum (cash flow must cover 125% of debt payments)
• Customer concentration: No single customer >20% of revenue
• Industry risk: Stable, established industries fare better than cyclical or declining sectors
• Collateral: Tangible assets (real estate, equipment, inventory) strengthen the loan

Buyer Qualifications:

• Industry experience: Lenders prefer buyers with relevant operational background
• Personal credit: Strong personal credit score (680+ for SBA)
• Liquidity: Cash reserves to cover working capital needs post-close
• Commitment: Borrower must work full-time in the business (for SBA loans)

Common Mistakes Owners Make When Seeking Acquisition Financing

The Role of Seller Financing

Seller financing (also called a seller note or seller carry-back) is when the seller agrees to finance a portion of the purchase price. This is common in small business acquisitions and serves multiple purposes: it reduces the cash required from the buyer, signals seller confidence to lenders, and can bridge valuation gaps. Typical seller notes range from 10–20% of the purchase price, with 3–5 year terms and interest rates of 5–8%.

Final Thoughts

Acquisition financing is a tool—not a guarantee. Lenders are looking for businesses with predictable cash flow, strong fundamentals, and capable operators. If you're pursuing an acquisition, start the financing process early, understand what lenders require, and structure deals that work for all parties. The best acquisitions are ones where the business's cash flow comfortably covers debt service, leaving room for reinvestment and growth.