What SBA Lenders Look For (And What Kills Deals at the Closing Table)
7 min read
The majority of small business acquisitions in the $300K–$3M range are financed with an SBA 7(a) loan. Understanding what SBA lenders require — and what causes them to decline a deal — is essential knowledge for any first-time buyer. Too many buyers find out their deal fails SBA criteria only after spending weeks and thousands of dollars on due diligence.
The DSCR Requirement
The single most important number in SBA financing is DSCR — Debt Service Coverage Ratio. The SBA requires a minimum DSCR of 1.25x. This means for every $1.00 of annual debt service, the business must generate at least $1.25 in adjusted SDE.
Example calculation:
Purchase price: $700,000
Down payment: $140,000 (20%)
Seller note: $70,000 (10%)
SBA loan: $490,000
Monthly payment at 11% over 10 years: ≈ $6,740
Annual debt service: ≈ $80,880
Required adjusted SDE to pass at 1.25x: $101,100
Down Payment Requirements
SBA 7(a) loans for business acquisitions require a minimum 10% down payment. In practice, lenders often require 15–20% for businesses with limited collateral. Acceptable sources include personal savings, retirement account rollovers (ROBS), and gifts from family members with documentation. What lenders will not accept: borrowed funds or credit card advances.
Seller Notes and Their Role
A seller note reduces the SBA loan amount, which reduces annual debt service and improves DSCR. SBA lenders view seller notes as a confidence signal. The SBA allows seller notes to count as equity injection under specific conditions: the note must be on full standby for at least the first two years of the SBA loan.
What Kills SBA Deals
- 1Tax returns do not match the broker's financials — lenders use IRS transcript numbers, not broker numbers
- 2Lease assignment issues — landlord will not assign lease or grant sufficient term
- 3License and permit transfers — certain businesses require licenses that may not transfer automatically
- 4Key-person dependency — revenue depends heavily on the seller's personal relationships
- 5Environmental issues — auto repair, dry cleaning, gas stations require environmental assessments
How to Pre-Screen a Deal Before LOI
Before spending money on due diligence, run your own DSCR calculation. If the deal barely passes at 1.25x, it probably fails when the lender uses tax return income. Target 1.40x or better before feeling confident the deal will close. MyDealCheck calculates DSCR automatically as part of the free score.