Most search fund acquisitions use SBA 7(a) loans for 70-80% of the purchase price. Understanding the 2026 rules and calculating eligibility upfront saves months of wasted time on deals that can't be financed.
SBA 7(a) Loan Basics (2026 Rules)
Key Loan Terms
- Maximum loan amount: $5,000,000
- SBA guarantee: 85% up to $150K, 75% above $150K
- Guarantee fee: 2-3.75% based on loan size
- Guarantee fee waiver: Manufacturing (NAICS 31-33) up to $950K until Sept 30, 2026
- Interest rates: Prime + 2.25-2.75% (typically 8-10% in 2026)
- Term: Up to 10 years for working capital, 25 years for real estate
Eligibility Requirements (2026 Rules)
Must-Have Requirements
- DSCR (Debt Service Coverage Ratio): Minimum 1.15x, lenders prefer 1.25x+
- Equity injection: Minimum 10%, lenders prefer 15%+ for deals >$1M
- Customer concentration: <50% from single customer (deal killer if exceeded)
- Passive income: <50% of revenue from passive sources
- Real estate: <51% of loan proceeds for real estate
- US ownership: 100% US citizens or permanent residents
- Business size: Net worth <$15M, net income <$5M (after-tax) averaged over 2 years
How to Calculate DSCR
Debt Service Coverage Ratio (DSCR) is the most critical metric. Here's how to calculate it:
DSCR Formula:
DSCR = Normalized EBITDA ÷ Annual Debt Service
Step 1: Calculate Normalized EBITDA
- Start with reported EBITDA
- Add back owner salary (at market rate: $150-250K for $2-5M revenue)
- Add back one-time expenses (verify they're truly one-time)
- Subtract one-time revenue (asset sales, settlements)
- Adjust for customer concentration risk if >20%
Step 2: Calculate Annual Debt Service
- Principal + Interest payments for the year
- For SBA 7(a): Typically 8-10% interest rate
- 10-year term for working capital, 25 years for real estate
- Use an amortization calculator or SBA loan calculator
Step 3: Calculate DSCR
Divide normalized EBITDA by annual debt service. Result should be >1.25x for best approval odds.
Example Calculation
Scenario: $3M purchase price, $600K normalized EBITDA
- Loan amount: $2.4M (80% of purchase price)
- Interest rate: 9% (Prime + 2.5%)
- Term: 10 years
- Annual debt service: ~$380K
- DSCR: $600K ÷ $380K = 1.58x ✅ (Meets requirement)
Common Deal Killers
Automatic Rejection Reasons
- Customer concentration >50% from single customer
- DSCR <1.15x (can't support debt service)
- Normalized EBITDA <$200K (too small to support debt)
- Passive income >50% of revenue
- Real estate >51% of loan proceeds
- Non-US ownership
- Business size exceeds SBA limits
2026 Rule Changes
- Manufacturing fee waiver: Extended until Sept 30, 2026 for NAICS 31-33 up to $950K
- DSCR requirements: Still 1.15x minimum, but lenders increasingly prefer 1.25x+
- Equity requirements: 15%+ preferred for deals >$1M (up from 10% minimum)
- Processing times: Vary by lender, typically 60-90 days
Tips for Search Fund Operators
- Calculate DSCR early: Don't waste months on deals that can't be financed
- Use normalized EBITDA: Not reported EBITDA - adjust for QoE issues
- Verify customer concentration: Get top 10 customer list before IOI
- Build relationships: Work with SBA-preferred lenders who understand search funds
- Plan for guarantee fee: Factor 2-3.75% into your total acquisition cost
Use Our Free SBA Calculator
SearchFindr includes a free SBA 7(a) loan calculator that automatically calculates DSCR, eligibility, and loan terms based on 2026 rules. No signup required.
Try Free SBA Calculator