Question 1

What is an SBA 7(a) loan?

Accepted Answer

An SBA 7(a) loan is the most common SBA loan program for buying a business. The SBA guarantees up to 75% of the loan, reducing risk for lenders. Maximum loan amount is $5 million, with terms up to 10 years for business acquisitions (25 years if real estate is included). Interest rates are typically Prime + 2.25-2.75%.

Question 2

What is DSCR and why does it matter?

Accepted Answer

Debt Service Coverage Ratio (DSCR) measures whether a business generates enough cash flow to cover its loan payments. It is calculated by dividing annual SDE (or cash flow) by annual debt service. SBA lenders typically require a minimum 1.25x DSCR, meaning the business earns $1.25 for every $1.00 in loan payments.

Question 3

What is the difference between SBA 7(a) and 504 loans?

Accepted Answer

SBA 7(a) loans are general-purpose and can be used for business acquisitions, working capital, and equipment. SBA 504 loans are specifically for major fixed assets like real estate and heavy equipment, offering lower fixed rates on the CDC portion (typically 40% of the project cost) with 25-year terms. For pure business acquisitions, 7(a) is the standard choice.

Question 4

How much down payment is required for an SBA loan?

Accepted Answer

SBA loans typically require a minimum 10% equity injection (down payment) from the buyer for business acquisitions. This can come from personal savings, retirement rollovers (ROBS), gifts, or other non-borrowed sources. Some lenders may require more depending on the deal's risk profile.

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