Is it Possible to Buy a Business Without Collateral?

By Jerry Myers, MBA, CBI


The value of most businesses is based primarily on their historic cash flow to the owner, also known as Total Owner Benefit.

For small businesses this measure of cash flow is called Discretionary Earnings. For larger businesses,  EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is the measure of earnings which is more often used.

For most successful businesses, the value of their historic cash flow is worth far more than their assets.  Which usually means there is not sufficient collateral owned by the business to qualify it to be purchased using a conventional loan, which must be fully collateralized.

For this reason, many businesses, and most small businesses, are purchased using a loan backed by the U.S. Small Business Administration (SBA).

The SBA’s 7(a) loan program provides banks with an incentive to make loans to buyers of businesses with insufficient collateral by guaranteeing a portion of the loan (usually 75%). This guaranteed portion of the loan represents collateral to a lender.  When the SBA guarantee is combined with the assets of the business, and in some cases personal assets of the buyer, there is often sufficient collateral for the lender to make the loan if the business qualifies for SBA financing.  

To qualify, the business must have good books and records, be priced appropriately for its historic cash flow, and meet certain maximum gross revenue and maximum employee limitations.

Other considerations of SBA financing are:

  1. Very low down payment requirement compared to conventional loans or seller financing (typically 10%).
  2. Much longer repayment terms than conventional loans or seller financing (typically 10 years for the business and 25 years for real estate).
  3. Usually the SBA lender is happy to also loan working capital to the borrower, assuming sufficient cash flow from the business.
  4. Interest rate charged is usually variable, modified each quarter as rates increase or decrease.
  5. Fees for the guaranteed portion of the loan (typically 75%) are paid by the borrower.  The fees are up to 3.75% of the guaranteed portion of the loan, and are added to the loan to be paid over the life of the loan.  However, see SPECIAL TEMPORARY SBA GUARANTY PROVISION below.
  6. The lender will usually put a second mortgage on the buyer’s home if there is 25% or more equity in the home.
  7. The lender will usually require life insurance on the life of the borrower for the amount of the loan.


Until rescinded, the SBA is waiving the guaranty fee on 7(a) loans under $500,000.  It is widely expected this provision will remain in place through the current fiscal year (through September 2023), but the SBA could rescind this provision at any time.

The business intermediaries in most VR Business Sales offices hold the Certified Business Intermediary designation from the International Business Brokers Association and are experts on the purchase of businesses using SBA-guaranteed loans, and would be happy to discuss details of SBA financing with business buyers or business owners.

Copyright: VR BUSINESS SALES, Springfield-Branson MO Office