When a buyer purchases your small business, they’re rarely paying with a suitcase full of cash. Most business sales are funded through a mix of sources: a bank loan, seller financing (where you act as a creditor), and the buyer’s own capital. Understanding how this mix works is important because it affects whether a buyer can close and what your risk is as the seller.
The typical capital stack for a small business sale looks something like this: 70 percent from an SBA loan, 20 percent from seller financing, and 10 percent from the buyer’s cash. But these percentages vary depending on the buyer, the business, and the terms.
SBA Loans
An SBA loan is a bank loan that’s guaranteed by the Small Business Administration. The SBA doesn’t lend the money directly—a bank does. But the SBA’s guarantee makes the bank more willing to lend, which means buyers can borrow more and at better terms than they could with a conventional loan.
Most small business acquisitions are funded with an SBA 7(a) loan, which is the most common small business loan program. The SBA will guarantee up to 75-80 percent of the loan amount, which means if the buyer defaults, the SBA covers the bank’s loss up to that percentage.
For the buyer, this is great. They can finance up to 80-90 percent of the purchase price with a reasonable interest rate (usually prime + 2-3 percent). The loan is amortized over 10 years typically, making the payment manageable.
For you as the seller, this matters because it determines how much cash you’re getting at closing. If the SBA loan covers $350,000 of a $500,000 purchase price, the buyer still needs to come up with $150,000 from other sources.
Seller Financing
Seller financing is when you, the seller, loan money to the buyer as part of the purchase. Effectively, you’re becoming the buyer’s creditor. You provide a promissory note at a specified interest rate over a specified term, and the buyer pays you over time.
A typical seller note might be $100,000 at 5 percent interest over five years. The buyer makes monthly payments to you. If they default, you can pursue legal remedies to recover the debt (though practically speaking, collecting can be difficult if the business fails).
Why would you agree to seller financing? Because it often makes deals possible. Without seller financing, a buyer with limited capital or imperfect credit might not be able to qualify for enough SBA lending. By providing 10-20 percent of the purchase price yourself, you expand the pool of qualified buyers.
Seller financing also signals confidence in the business. A buyer sees that you’re willing to bet on the business’s cash flow being strong enough to cover loan payments. That’s actually attractive to buyers—it shows you believe in the business.
The downside: you’re taking credit risk. If the buyer struggles and can’t pay, you’re a creditor trying to recover from a failed business. You typically have a security interest in the business assets, which means if things go bad, you have a claim on those assets. But enforcing that claim can be time-consuming and legally expensive.
Before you agree to seller financing, understand the buyer’s creditworthiness and the business’s cash flow. Does the business generate enough cash to service all debt (the SBA loan plus your note)? If it doesn’t, the buyer might default on your note because the SBA gets priority.
Buyer’s Equity
The buyer’s own money is typically 10-20 percent of the purchase price. This is their skin in the game. The more equity they put in, the more incentive they have to make the business succeed. Buyers who put up minimal equity sometimes struggle more because they’re betting with someone else’s money.
From your perspective, the more equity the buyer has, the lower your financing risk. A buyer with 20 percent down has more resources and more to lose, which makes them more likely to succeed and pay you whatever seller financing you’ve provided.
Why This Matters to You
As the seller, understanding the typical capital stack matters because:
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It affects closing. If a buyer can’t secure enough SBA financing, they might ask you to carry a larger seller note. You need to know if you’re comfortable with that risk.
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It affects deal structure. Some sellers require proof of funding before signing the Letter of Intent. You don’t want to spend 90 days in due diligence only to learn the buyer can’t actually close because they can’t get financing.
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It affects your return. If part of your payment is a seller note, you’re receiving interest income over time rather than a lump sum at closing. Depending on your tax situation and income needs, this might be positive or negative.
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It affects business structure. To maximize SBA lending, your business should be SBA-eligible. Certain business types (law firms, practices of certain professionals) are harder to finance. If you’re selling a business that’s difficult to finance, you’ll need to work with more creative buyers or provide more seller financing.
Making Your Business Financeable
If you want to maximize the pool of interested buyers, structure your business to be attractive to SBA lenders. That means:
- Clean, audited or reviewed financial statements
- Recurring revenue and diversified customer base
- Documented systems and processes (key person risk is reduced)
- Strong profit margins
- Clear contracts with major customers
- Healthy debt ratios
Businesses that score well on these metrics get better SBA terms, which means buyers can finance more, which means you get more cash at closing and carry less seller financing yourself.
The typical capital stack—70 percent SBA, 20 percent seller note, 10 percent buyer equity—works because it balances the interests of lenders, sellers, and buyers. You should understand where the money is coming from in your deal and make sure the structure is sustainable for everyone involved. If the buyer can’t service the total debt load, the deal will fail and you’ll be left recovering a defaulted note.