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Down Payment to Buy a Business: How Financing Impacts the Amount of the Down Payment

One of the first questions buyers need to consider is:

Have you thought about how much cash you are willing to write a check for to use as a down payment on a business?

It might surprise you how many times that question catches people off guard. As a buyer, that needs to be one of the first things you think about. The odds of acquiring a business with $0 cash down are less than 1%. A guy once told me he went to meet with the owner of a day care center to talk about acquiring the center. He showed up to the meeting with a brown paper sack containing $5,000 cash. He left the meeting with a day care center. That’s a true story, and that’s the closest I have ever heard of anybody buying a business for $0 cash down. How much cash for a down payment a buyer needs, however, is a nuanced question.

How Tangible Assets Impact Valuation When Buying a Business

Buying a business is a unique process. Buying a house, when you get down to it, is much like buying a car. The value of the acquisition is the value of the hard asset involved. A hard asset is also called a tangible asset.

These physical asset types have an intrinsic value associated with them. The intrinsic value of these assets is oftentimes established by a market of supply and demand. What will it sell for on the open market? Equipment is a hard asset and can vary widely as to how valuable it is. A CNC machine holds significant value. Restaurant equipment is pennies on the dollar if you’re lucky. Both of those, though, are hard assets. In most situations, the value of these assets is determined using a Fair Market Value approach. The IRS defines Fair Market Value as “the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”

Why does this matter when talking about the amount of a down payment? Because the down payment amount is all about the type of loan used to finance the deal. Oftentimes, the type of loan being offered is determined by the value of the company’s tangible/hard assets. The hard assets can be considered collateral for a business loan. A buyer’s cash down payment depends on the value of the business’ hard assets. A bank will only loan on a certain amount of that value. The value of those hard assets is how much money the bank thinks it can get to liquidate the business’ assets should things go south. The buyer’s cash and/or personal collateral make up the difference. This is the meaning of collateral. The bank is going to minimize their risk as much as possible, and a buyer’s cash down payment helps achieve that goal.

How Do Banks Determine Tangible and Intangible Assets to Use as Collateral?

Banks are hard asset lenders. Put another way, they will loan money only on hard assets. But those hard assets must have intrinsic, re-sale value. Real estate, machinery, heavy equipment, some types of inventories have value as collateral for a loan from a bank. However, banks will not loan money on other types of hard assets. Tables, chairs, cell phones, computers, certain fixtures – will not be considered collateral for a bank. Additionally, the bank will only loan on a percentage of the value assessed – not the full value. There will most likely be a gap in the amount of hard assets financed, and the total agreed upon asking price. The gap is often covered by the buyer’s collateral and buyer’s cash. Buyers can expect to put at least 20% - 30% cash down on a conventional business loan.

Financing Options and Their Impact on Down Payment Requirements

The value of a business is often based on intangible value. Hard assets – not counting real estate which carries its own market value – are rarely ever used in valuing a business. A business that owns its real estate has two components of value: the real estate value, and the business value. The business value includes the equipment and assets. The asking price of a business is often based on a multiple of cash flow (SDE or EBITDA), or a percentage of revenue. Any real estate being sold along with the business carries its own market value and is added to the business value. Real estate is very helpful in financing.

The business value based on a numbers approach – a multiple of cash flow or percentage of revenue – is difficult to back by anything tangible, especially when the fair market value of a business’s equipment is minimal. This would not qualify for a conventional loan. Without a conventional loan, what are other options, and what are the down payment requirements for buyers?

Here is a perfect example. We sold a solar panel installation company in 2021. The company leased a small office, thus owned no real estate. There was minimal equipment and inventory. The company sold for $825,000. Below are the vitals of the solar company.

Last Full Year Revenue = $1,680,000

Last Full Year Net Income = $275,500

Last Full Year Discretionary Earnings = $341,000

Those are all healthy numbers. The final asking price ended up being 2.4 x SDE. This is a very reasonable multiple. The deal was fair for both sides.

The hard assets that transferred with the business carried an agreed upon fair market value of $43,925. Inventory at seller cost amounted to $8,000. Total hard assets of this business equaled $51,925. The value of this business was certainly not in the hard assets. Price Allocation looked like this:

FFE = 43,925

Non-Compete = 1,000

Inventory = 8,000

Other – “Goodwill” = 772,075

Total Value = 825,000

The average buyer looks to spend the least amount of cash out-of-pocket as possible to purchase a business. Consider the $825,000 solar company scenario above. Even if a lender extended a conventional loan on this deal, the buyer would be looking at a cash down payment of at least $205,000 – 20% or more of the asking price.

SBA Loans to Acquire a Business: Reducing Risk and Down Payment Requirements

A more common scenario in my experience involves SBA loans. SBA loans come with a government guarantee. The Small Business Administration guarantees a portion of the loan for the lender, which lowers the lender’s risk. Because the guaranty reduces that risk, SBA lenders can finance acquisitions where most of the value is intangible rather than tied to hard collateral. That is the purpose of the program, and it is why most small business acquisition loans are SBA loans.

Once again, consider the solar company. There were no hard assets worth collateralizing. The goodwill value was essentially the asking price. No conventional loan would cover this business. The SBA 7(a) loan program, however, is designed for exactly this type of transaction.

It is important to understand that the SBA guaranty percentage is separate from the buyer’s required equity injection. For a change of ownership financed with an SBA 7(a) loan, buyers should plan for a minimum equity injection of 10% of the total project cost – and total project cost means the purchase price plus closing costs, working capital, and other costs to complete the deal, not just the sticker price.

The rules around where that 10% comes from tightened under SBA SOP 50 10 8.1, the updated lending rulebook that applies to loans receiving an SBA loan number on or after October 1, 2026. Under the new SOP, seller standby notes, other standby debt, and equity from non-controlling minority investors are treated as “limited” sources that together cannot cover more than half of the required injection. In practice, that means a buyer should expect to bring at least 5% of total project cost as their own cash. Applications that received a loan number on or before September 30, 2026 remain under the prior SOP.

SOP 50 10 8.1 also sorts every change of ownership into one of four categories – initial acquisition, business expansion, owner buyout, and ESOP or cooperative – and each category carries its own equity, debt service coverage, and valuation standards. First-time buyers fall under initial acquisition, which carries a 1.25x debt service coverage requirement. Deals with a business purchase price of $3 million or more also require a Quality of Earnings report in addition to the business valuation.

These requirements change periodically, and lenders apply their own overlays on top of them. Confirm your required cash contribution, seller-note terms, and coverage math with an SBA lender before you write an offer.

Bridging the Gap: Using Seller Financing to Reduce Down Payment Amount

According to the BizBuySell Insight Report, 2,117 businesses changed hands in Q2 2026. Nearly eight in ten buyers (78%) said they expect to use SBA financing to complete an acquisition, and 90% expect seller financing to be part of their strategy – while only 29% of business owners plan to offer it. Almost half of sellers say they will not provide seller financing at all, and another 23% remain undecided. That gap is one of the widest disconnects in the market, and it is why most deals end up combining both – an SBA loan with a seller note in second position. A seller note can reduce the amount of cash a buyer brings to closing, and it signals the seller’s confidence in the business.

Assume a scenario where the buyer puts down 10% and the seller carries 10%. At closing, the seller walks away with 90% of the cash up front – the buyer’s 10% plus 80% financed by the bank and backed by an SBA guaranty. The buyer conserves cash, the lender’s risk is reduced, and the seller still collects a large lump sum at closing.

Structure matters here. A seller note that sits on top of a fully funded buyer injection is treated differently than a seller note used to satisfy part of the required injection. When the note is counted toward the injection, it must be on full standby – no principal or interest payments – and it can only cover part of the requirement. Sellers and buyers should agree on which role the note is playing before the loan is submitted.

For a typical first-time acquisition using SBA 7(a) financing, plan around a 10% minimum equity injection, with at least half of that coming from the buyer’s own funds. Conventional loans generally require more, and expansions, owner buyouts, and employee-ownership deals are evaluated under their own standards.

There are many creative ways to negotiate a deal and reduce the amount of cash required for a down payment for buying a business. Consider working with a business broker to help negotiate the best deal. Visit the BizBuySell Broker Directory to locate a business broker that is just right for your entrepreneurial goals.

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