SHANE PIERSON
Purveyor of Honest Capital
Owning a business doesn’t have to stay on your “someday” list. With an SBA loan, you can turn $54,000 into a million-dollar business. Yep, you read that right. The SBA’s 7(a) loan program is designed to make business ownership accessible—even if you don’t have piles of cash sitting around. Let’s break it down, explore why slightly larger businesses can make even better investments, and explain some of the industry jargon so everything makes sense.
What Does a $1,000,000 Business Really Look Like?
Most businesses selling for around $1,000,000 are priced at 3 to 3.5 times their annual cash flow. In plain English, this means the business generates $285,000 to $330,000 in cash flow each year (after expenses but before taxes). That’s what the business puts in your pocket if everything runs as it should.
Now, here’s where it gets super interesting:
With the SBA loan structure we’re discussing, your initial investment is $54,000. Let’s assume the business produces $300,000 in cash flow (right in the middle of that typical range). Subtract your loan payment, and you could still net $100,000 to $150,000 in the first year. That’s a cash-on-cash return of 185% to 278%! Sure, there might be other costs in your first year of transition, but the point is, these numbers aren’t a joke.
Let that sink in real deep. Even after covering the loan payments, your $54,000 investment is putting serious money back in your pocket every year. This is why shooting for a slightly larger, higher-performing business can often be a smarter move than aiming too small.
How the Financing Works
Here’s how a $1,000,000 business acquisition with $60,000 in working capital could be structured for any business that you look into:
- Business Purchase Price: $1,000,000
- Working Capital: $60,000 (to cover initial operating costs)
- Total Project Cost: $1,060,000
- Seller Carry Note: $54,000 (the seller finances part of the cost)
- Buyer Injection (Down Payment): $54,000
- SBA Loan: $972,000
What’s a Seller Carry Note?
This is when the seller agrees to finance part of the purchase price—5% in this case ($54,000)—which you’ll repay over time. For this structure, the carry note must have no balloon payments (a big lump sum due at the end) and must amortize over its full term.
Sellers often agree to this because it shows they believe in the business’s ongoing success. You’ll make interest-only payments on this note for the first two years, followed by full payments (principal + interest) after that.
There are a few other options that the SBA might allow that could make this work and still appease an ornery seller. Reach out and we can dig deeper.
Where Do You Find $54,000?
If you don’t have $54,000 sitting in a savings account, don’t worry about it. Here are a few options that many other buyers are using to get deals to work:
- ROBS (Rollovers as Business Startups)
Use your retirement funds to buy the business without paying taxes or penalties. It’s a legal and popular option, but it must be set up correctly. You can reach out to me and ill get you introduced to someone that can help you navigate this. - HELOC (Home Equity Line of Credit)
Leverage equity in your home or a rental property. HELOCs usually have lower interest rates than personal loans, making them an affordable way to fund your down payment. Credit unions are great for this, or I can connect you with a lender. Just schedule a time to meet and let’t chat. - Friends, Family, or Investors
Consider borrowing from friends or family (document it well) or finding a minority investor who takes less than 20% ownership. Why less than 20%? It keeps the SBA’s guarantee requirements simple and avoids adding complexity to the deal.
No SBA Guarantee Fee Below $1,000,000
Here’s a bonus for smaller deals: If your total SBA loan is under $1,000,000, you avoid the SBA guarantee fee, which is typically around 2.6% to 2.7% of the total loan amount. On a $972,000 loan, that’s a savings of about $25,000!
This makes deals just under the million-dollar mark even more attractive, as they save you a rather large chunk of the upfront costs.
Collateral: The Real Story
When it comes to SBA loans, lenders usually want you to pledge additional collateral if you have it. For most people, that means your house.
If your home (or rental property) has more than 25% equity, expect that the SBA will want you to pledge it as collateral. Even if it has less than that, some lenders will still ask for it, especially if the business’s assets do not fully cover the loan. This is a commonly the case.
Why does this matter? It’s about reducing the lender’s risk in your request, but don’t let this scare you off. It’s totally standard practice and can be worth it for the returns a successful business can bring.
Why a Larger Business is Often Better
Smaller businesses might seem like a safer bet, but larger businesses usually generate stronger cash flow. That means more room to cover loan payments, reinvest in growing the business, and, most importantly, pay yourself a heftier profit.
With a $1,000,000 business, the numbers are much sexier than you might think and often work in your favor:
- More predictable revenue.
- Professionalized operations (you’re buying a business, not a job).
- Greater return on invesmtent potential with SBA financing.
These businesses are priced at 3-3.5x the cash flow that the business generates for a reason. They have proven their value historically.
Ready to Take the Leap?
If you’re serious about owning a business, start by targeting industries that match your skills or experience. It makes lenders more comfortable and sets you up for success.
If you have questions about ROBS, HELOCs, or finding the right business? Let’s talk. Whether it’s financing or finding the right fit, I’m here to help.
Your dream business is closer than you think—all it takes is $54,000 and some hustle.
