Top Five Borrower Mistakes When Applying for an SBA Acquisition Loan—and How to Avoid Them!
Published 6/30/2025
Why SBA Business Acquisition Loans Matter for Small Businesses
In today’s dynamic business landscape, acquiring an existing business often presents a more strategic path to entrepreneurship than starting from scratch. With SBA 7(a) loans reaching $25.7 billion in FY 2023 and 17,430 M&A deals in 2024, business acquisitions represent a significant portion of SBA lending. These loans have become a cornerstone of small business growth, offering entrepreneurs a viable path to business ownership without depleting their entire savings. SBA acquisition loans are particularly crucial as they address a critical gap in the market: while traditional banks might shy away from financing business acquisitions without substantial collateral or down payments, SBA loans provide the flexibility and accessibility that emerging entrepreneurs need. By guaranteeing a portion of the loan amount, the SBA enables lenders to take calculated risks on promising business acquisitions that might otherwise go unfunded.
What Is an SBA Business Acquisition Loan?
Small business owners looking to expand through acquisition often face a significant hurdle: access to capital. SBA business acquisition loans, primarily through the 7(a) program, offer a powerful solution by providing government-backed financing with lower down payments (10-20%) and longer repayment terms (up to 10 years).
These loans serve as a crucial bridge for entrepreneurs, making business acquisition more accessible, especially for buyers who might not qualify for conventional financing. It’s a chance to grow your business without needing a huge pile of cash upfront.
Top 5 Borrower Mistakes (and How to Avoid Them)
Mistake #1: How to Value and Understand if a Business is a Good Business or Not
Real-World Scenario:
Marcus paid a premium for a restaurant based solely on the seller’s profit claims, only to discover post-acquisition that the financials had been significantly inflated.
What Happens
Eager buyers often rush through valuation, relying too heavily on seller-provided information without proper verification. Many fail to analyze financial statements, customer concentration risks, or market positioning.
Why It’s a Problem
Overvaluing a business leads to overpayment and potential loan default when the business can’t generate sufficient cash flow to service the debt. Lenders also scrutinize valuations closely, often rejecting loans for businesses they believe are overpriced.
How to Avoid
Understanding how to properly value a business is critical. According to TD Bank’s business valuation guide, “Understanding what your business is worth isn’t just about setting a sale price. It’s about having a clear picture of your company’s financial health and potential.”
When evaluating a business, pay close attention to:
- Revenue and expense trends over multiple years
- Customer and supplier concentration issues (are revenues dependent on just a few clients?)
- Industry comparables and market position
- Quality of assets and potential liabilities
- Examine at least three years of financial statements and verify revenue claims through tax returns and other documentation.
📌 Key Takeaway
A proper business valuation isn’t just a lender requirement—it’s your protection against overpaying and ensures you can realistically service the loan with the acquired business’s cash flow.
💡 Pro Tip
Use multiple valuation methods (asset-based, income-based, and market-based) to triangulate the business’s true value, and always conduct customer interviews to verify the business’s market position and reputation.
Mistake #2: How to Get Capital to Purchase the Business
Real-World Scenario:
Jessica was approved for an SBA loan but couldn’t close because she hadn’t prepared for the additional working capital needed post-acquisition.
What Happens
Buyers focus exclusively on the purchase price without developing a comprehensive capital strategy that includes down payment, closing costs, working capital needs, and unexpected expenses.
Why It’s a Problem
Insufficient capitalization is among the top reasons for business failure post-acquisition. Even with SBA financing, buyers need substantial personal investment and liquidity reserves.
How to Avoid
Develop a comprehensive capital stack that combines multiple funding sources. Using private money, SBA debt, and seller financing together can create an optimal capital structure for business acquisition. Each source has unique advantages:
- Private capital: Shows lender commitment and skin in the game
- SBA debt: Provides favorable terms with lower down payments (10-20%) and longer repayment periods
- Seller financing: Demonstrates seller confidence in the business’s future and can bridge funding gaps
Create a capital needs assessment that goes beyond just purchase price to include working capital, transition costs, and emergency reserves.
📌 Key Takeaway
Successful acquisitions require a comprehensive capital strategy that extends beyond just securing the purchase loan—combining multiple funding sources creates flexibility and reduces risk.
💡 Pro Tip
Ask the seller to finance 10-15% of the purchase price—not only does this reduce your capital needs, but it also demonstrates the seller’s confidence in the business’s future performance under your ownership.
Mistake #3: Common Points of Negotiation
Real-World Scenario:
Robert agreed to the first asking price and seller terms, missing opportunities to structure favorable conditions that would have eased his cash flow during the critical transition period.
What Happens
Inexperienced buyers often accept seller terms without negotiation, missing opportunities to structure deals that protect their interests through creative financing arrangements.
Why It’s a Problem
Poor deal structuring can create cash flow challenges, leave buyers vulnerable to competition from former owners, or result in difficult transitions when seller support ends prematurely.
How to Avoid
Beyond just negotiating price, focus on creative deal structures such as:
- Seller notes with negotiated terms: Structure payments to align with cash flow cycles or include performance-based adjustments
- Partial buyouts: Consider phased acquisitions where you purchase a portion initially and the remainder after performance milestones
- Seller rebates: Negotiate performance guarantees where the seller refunds a portion of the purchase price if certain metrics aren’t met
Other key negotiation points should include transition period length and seller involvement, customer and vendor relationship transfers, non-compete agreements, and contingency clauses.
📌 Key Takeaway
The terms of your acquisition can be as important as the price—focus on negotiating a complete package that facilitates smooth ownership transition and protects your investment.
💡 Pro Tip
Consider performance-based earnouts where a portion of the purchase price is contingent on the business meeting specific performance targets post-acquisition—this aligns seller incentives with your success and reduces upfront capital requirements.
Mistake #4: Personal Credit and Financial Strength
Real-World Scenario:
Despite finding a profitable business with strong financials, Alicia was denied an SBA loan because of her 620 credit score and recent late payments on personal obligations.
What Happens
Many applicants don’t check their credit score or fix past financial issues before applying, not realizing lenders typically want a score of 650+ and a clean personal financial record.
Why It’s a Problem
When trying to obtain a business acquisition loan, your personal financial history serves as a key indicator of your ability to manage business finances. Lenders view your credit history as a reflection of your financial responsibility.
How to Avoid
Focus on these key areas to strengthen your personal financial profile:
- Make all payments on time consistently for at least 12 months before applying
- Reduce personal debt levels, particularly credit card balances
- Build and grow your personal net worth through savings and investments
- Maintain accurate personal financial statements and tax returns
Give yourself at least 6-12 months to improve your credit profile before applying for an SBA acquisition loan.
📌 Key Takeaway
Your personal financial strength is just as important as the business financials in SBA lending decisions. View credit improvement and net worth growth as part of your acquisition preparation process.
💡 Pro Tip
If you have credit challenges, consider bringing in a credit-strong business partner or
guarantor to strengthen your application—this can significantly improve approval odds while you work on building your own credit profile.
Mistake #5: Misunderstanding Collateral Requirements
Real-World Scenario:
Michael was worried about applying for an SBA loan because he didn’t own a home or have significant personal assets to pledge as collateral.
What Happens
Many potential buyers mistakenly believe that substantial personal collateral is always required for SBA business acquisition loans, causing them to delay or abandon their acquisition plans.
Why It’s a Problem
This misconception prevents qualified entrepreneurs from pursuing viable business opportunities and accessing the favorable terms of SBA financing.
How to Avoid
Understand that collateral isn’t always necessary! SBA loans actually help lenders have a larger credit appetite when traditional collateral isn’t available. The SBA guarantee reduces the lender’s risk, allowing them to focus more on:
- The cash flow potential of the business being acquired
- Your industry experience and management capabilities
- The overall viability of the business plan
While some collateral is typically preferred, the SBA program specifically exists to help borrowers who might not qualify for conventional financing due to limited collateral.
📌 Key Takeaway
Don’t let limited collateral discourage you from pursuing an SBA acquisition loan. The program is designed specifically to address this gap in traditional lending.
💡 Pro Tip
When collateral is limited, focus on strengthening other aspects of your application—particularly your business plan, industry experience, and the quality of the business you’re acquiring. These factors can often compensate for limited tangible assets.
Bonus Tips for a Smooth SBA Business Acquisition Loan Application
Quick Steps to Boost Your Odds
Prepare Early:
- Check your credit early and fix issues—aim for 650 or higher.
- Highlight any industry experience to show you can run the business.
- Pick a lender with SBA expertise (ask about their loan volume).
- Consider seller financing to lower your loan amount and show shared risk.
Documentation Strategy:
- Organize business acquisition documents chronologically
- Create an executive summary highlighting the business’s strengths
- Include market analysis showing growth potential
- Document your management team’s relevant experience
Lender Selection Matters:
Choose a lender with significant SBA experience who understands your industry. Working with lenders who process many SBA loans can significantly improve your chances of approval and reduce processing time.
📌 Key Takeaway:
Success with SBA acquisition loans comes from preparation, patience, and partnership with the right lender. By avoiding these common mistakes, you dramatically increase your chances of loan approval and subsequent business success.
