Most people think buying a business requires a massive pile of cash up front. Six figures minimum, maybe more. And if you do not have it sitting in a savings account, you are out of luck.
That framing is wrong. It causes a lot of serious buyers to sit on the sidelines longer than they need to.
Here is what the down payment for buying a business actually looks like, where the funds can come from, and how the math works when you run a real deal through an SBA 7(a) structure.
The 10% Rule: What the SBA Actually Requires
The SBA 7(a) loan program requires a minimum 10% equity injection on business acquisitions. That is the floor, and lenders underwrite to it. Not a guideline. A requirement.
Buying a $1M business means $100K. A $2M deal means $200K. The SBA does not budge on this number.
The loan covers the rest, up to $5M. So the maximum you can finance through a single SBA 7(a) loan is $5M, which means it handles acquisitions up to roughly $5.5M in total deal size before you need to layer in additional capital structures.
What surprises most people is how different this is from what they are used to. Real estate buyers are conditioned to think 20% down. Conventional business loans sometimes require 25% to 30%. The SBA program was designed specifically to lower that barrier, and the 10% minimum is one of the primary ways it does that.
One clarification worth making early: “equity injection” in SBA terms means the full down payment. It is your skin in the game, verifiable to the lender, sourced and documented before closing.
Where the Down Payment Can Actually Come From
This is where most buyers have blind spots. The 10% does not have to be cash sitting in a checking account. SBA allows several legitimate sources, and understanding them changes what is realistically within reach.
Personal savings and liquid accounts. The most straightforward source. Cash, checking, savings, money market accounts. Clean and easy to document.
Retirement account rollover (ROBS). A 401(k) or IRA can be rolled into a new C-corporation that then invests in the business. This is called a ROBS structure (Rollovers for Business Startups, and yes it is as complicated as it sounds) and is fully legal when done correctly. It requires a qualified third-party administrator, and your tax and legal team need to be involved from the start. But it is a real option that many buyers use.
Home equity. A HELOC or home equity loan can contribute to the equity injection, provided it is properly documented and disclosed to the lender. Some lenders are comfortable with this. Others want to see that the HELOC payments do not create additional personal debt service that breaks your cash flow analysis.
Gifted funds. SBA allows gifted funds from a family member with a gift letter confirming no repayment is expected. This has to be documented correctly and is subject to lender approval.
Seller-financed equity. In certain cases, a seller note can count toward the equity injection, but only when structured as a full standby note. More on this in the next section.
The key is documentation. Every dollar of equity injection gets traced by the lender. Source it, document it, and be ready to show a paper trail going back at least 60 days.
How the Seller Note Fits Into the Down Payment Structure
A seller note is the seller agreeing to finance a portion of the purchase price rather than taking it all in cash at close. This is standard in SBA deals. We use it on the vast majority of transactions we advise on.
Here is how it typically affects the down payment equation:
- SBA 7(a) loan: 80% to 85% of purchase price
- Seller note: 5% to 10% of purchase price
- Buyer equity injection: 10% of purchase price
When a seller note is structured correctly as a full standby note (meaning the seller receives zero principal and zero interest payments for the duration of the SBA loan), some lenders will allow it to partially satisfy the equity injection requirement. We achieve full standby terms on 90% or more of the deals we close. Zero interest. Zero payments. For the life of the SBA loan.
The practical effect: a buyer with $75K in liquid assets buying a $1M business might be able to structure a deal where a $50K seller note on full standby, combined with $75K in cash, clears the equity injection requirement.
This is not a loophole. It is how the program was designed. The seller staying in the deal economically signals alignment, and lenders recognize that.
What the Numbers Look Like on an Actual Deal
So that covers how the pieces fit together. Now here is what it looks like with real numbers.
Say you are looking at a commercial cleaning company listed at $1.5M. The broker lists $500K in seller discretionary earnings, which puts it at a 3x multiple. That is a reasonable asking multiple for a service business with stable contracts.
But here is the part most buyers skip: SDE is a broker-friendly number. It almost always overstates what the business actually produces in free cash flow. We discount SDE by 15% to 50% depending on what we find in diligence. On a deal like this, a 20% haircut would drop that $500K to $400K in estimated real cash flow, and that is a conservative adjustment. If proof of cash (matching bank deposits to reported revenue, line by line) does not tie to the tax returns, the discount gets steeper. Walk if it does not tie.
Your SBA loan would be structured around 90% of the acquisition price, or $1.35M. At SBA rates (which are tied to WSJ Prime plus 1.5% to 2.75%, depending on the lender) on a 10-year term, that generates roughly $18,000 to $19,000 per month in debt service, give or take based on where rates land at closing.
Annual debt service: approximately $216K to $228K.
Using the adjusted cash flow figure of $400K against $220K in debt service gives you a DSCR of roughly 1.82x. That clears the 1.5x SBA floor but falls short of the 2x benchmark we target on acquisitions. A deal at this level still works, but it is tighter than you want. If the real cash flow turns out to be lower than $400K after full diligence, you are staring at a 1.5x DSCR or worse, and that is dangerous territory.
And there is another piece most buyers leave out of the closing calculation entirely: working capital. You need 2 to 6 months of operating expenses set aside post-close to cover the transition period. That capital has to come from somewhere, and it is separate from your equity injection. On a business with $30K per month in operating costs, that is $60K to $180K that needs to be accounted for in your deal structure.
Your equity injection on a $1.5M deal: $150K minimum. If the seller agrees to a $75K standby note, you need $75K in verifiable liquid capital to close. That is a very different number than $150K.
The mechanics of the seller note are why the down payment for buying a business through SBA is lower in practice than the 10% headline figure suggests.
What Kills the Down Payment Calculation
Getting the equity injection wrong is one of the fastest ways to lose a deal after you are already deep in diligence. We have watched this play out enough times to know the patterns.
Undisclosed debt. If you take out a HELOC or personal loan to fund part of your equity injection and do not disclose it, lenders will find it. They pull credit and verify assets. Undisclosed liabilities are a deal-killer.
Sourcing issues on cash. Large deposits in the 60 to 90 days before closing will get questioned. If you moved money from a relative’s account to yours informally, the lender needs documentation. Plan for this early, not the week before closing.
Equity injection shortfalls at closing. The lender verifies your equity injection at closing, not just at underwriting. If your liquid position drops between approval and closing because you paid off debt, made a large purchase, or had an emergency, you may need to scramble. Keep your injection funds stable and liquid from the moment you go under letter of intent.
Trying to use a seller note that is not on full standby. If the seller note has active payments during the SBA loan term, it does not count toward equity injection and adds to your personal debt service. Structure matters more than price on these deals, and the seller note terms are where that principle shows up most clearly.
Working the Down Payment Into Your Search Criteria
The down payment requirement should inform what deal size you target from day one. Not after you find a business you like. Before.
If you have $150K in verifiable liquid assets available for a down payment, you can realistically target acquisitions up to $1.5M using cash alone. With a seller note on standby, you potentially reach $2M to $2.5M depending on deal structure and lender flexibility.
That is a wide range of businesses. At $1M to $2.5M in acquisition price, you are looking at businesses generating $300K to $800K in SDE (remembering that SDE requires a haircut to get to real cash flow). That is a meaningful income replacement and wealth-building vehicle for a first-time buyer.
But this is not passive income. Worth understanding before you get too deep into any deal. You are buying a job alongside a business, at least for the first year or two.
Start with what you have. Work backward to the deal size it supports. Then find businesses that fit.
We look at 120 to 150 deals per week and the majority of them fall in this range. There is no shortage of quality businesses in the $750K to $3M acquisition price window. The constraint is rarely capital availability. It is deal quality and buyer readiness.
Frequently Asked Questions
What is the minimum down payment for buying a business with an SBA loan?
The SBA 7(a) program requires a minimum 10% equity injection. On a $1M acquisition, that is $100K. In practice, a structured seller note on full standby can reduce the liquid cash you need to bring to closing. Some buyers close with as little as 5% to 7% in personal liquid assets when the deal is structured correctly with standby seller financing.
Can I use my 401(k) as a down payment for buying a business?
Yes. A ROBS (Rollover for Business Startups) structure allows you to roll retirement funds into a new C-corporation that invests in the business. It is legal when executed properly and requires a qualified third-party administrator. Your tax advisor and attorney should be involved before you pursue this route, as the compliance requirements are specific.
Does the seller note count as part of the down payment?
It can. If the seller note is structured as a full standby note with no principal or interest payments during the SBA loan term, many SBA lenders will count it toward the equity injection requirement. This is a standard deal structure and one we use on the majority of acquisitions we advise on. We achieve these terms on over 90% of our deals.
How do lenders verify my down payment for buying a business?
Lenders require 60 to 90 days of bank statements covering any account used for the equity injection. Large or unusual deposits will be questioned and require documentation. Retirement accounts, brokerage accounts, and other liquid assets are verified with current statements. Undisclosed loans or informal transfers will create problems during underwriting.
Can I borrow the down payment from a family member?
Gifted funds are allowed under SBA guidelines with a gift letter confirming no repayment is expected. Loans from family members are treated differently and must be disclosed. If repayment is required, the lender factors those payments into your personal debt service, which can affect deal qualification.
Thinking About Buying a Business This Year?
Regalis Capital is a buy-side M&A advisory firm. We handle the full acquisition process for serious buyers: sourcing deals, running the numbers, structuring the offer, managing the SBA process, and getting to close.
If you want a team that reviews over 120 deals a week and knows how to structure the down payment for buying a business so the seller note and equity injection actually work together, start with our process here.