The Art of SBA Deal Structuring

Author: Brian Word Count: ~1,500 Keywords: SBA deal structuring tips, structuring SBA loan Last Updated: March 2026

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I think most originators treat deal structuring like a checklist: get the LOI, verify the equity injection, run the DSCR, submit. Check the boxes, move on. And technically, that's correct — those are the components. But structuring a deal well versus structuring a deal correctly are two very different things. One gets you an approval. The other gets you a closing. I've seen hundreds of transactions that were "correctly" structured on paper and still died in committee because nobody stopped to ask the harder questions.

Good structure follows the rules. Great structure tells a story the credit committee can get behind — and that story starts long before you touch a form.

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What Separates Good Structure from Great

Good structure satisfies the SBA Standard Operating Procedure. It hits the minimum equity injection, the DSCR clears 1.15x or whatever the lender's floor is, and the use of proceeds makes sense on its face. Good structure gets you through the door.

Great structure anticipates every question the underwriter and credit officer will ask and answers them before they're raised. It's the difference between a package that says "here's the deal" and a package that says "here's the deal, here's why it works, and here's what we've done about every risk you're going to flag."

I think the best analogy is trial preparation. When I was practicing law, we never walked into a courtroom hoping the other side wouldn't bring up a weakness in our case. We identified every weakness ourselves, built arguments to address each one, and presented them preemptively. The jury never heard the problem for the first time from opposing counsel. SBA deal structuring works the same way. The credit committee should never encounter a risk that you haven't already addressed in your package.

If you want the full mechanics of how SBA 7(a) deals work from eligibility through closing, the Complete Guide to SBA 7(a) Loans covers the program end to end. This article is about the craft of putting those mechanics together in a way that closes.

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The LOI as Your Foundation

The letter of intent is where deals are won or lost, and most people don't realize it. An LOI isn't a formality. It's the structural blueprint for the entire transaction. Every number in your SBA package traces back to what's in that document — the purchase price, the allocation between assets and goodwill, the seller's role post-closing, the contingencies.

I review the LOI before anything else. If the LOI is vague on allocation, you're going to have problems with collateral analysis. If it doesn't mention equity injection at all, the credit officer is already skeptical. If the transition period is either absent or unrealistically long, that raises questions about how dependent the business is on the current owner.

What I look for specifically:

• Clear purchase price with a breakdown of what's included (assets, inventory, goodwill, real estate if applicable)
• Explicit mention of buyer equity injection — even a sentence acknowledging it tells the lender this was a serious negotiation
• Seller note terms spelled out, including whether it's on standby
• Transition plan — how long the seller stays, in what capacity, and what happens if the buyer needs more time
• Contingencies that are reasonable, not open-ended

A well-drafted LOI saves you twenty hours of back-and-forth downstream. A sloppy one creates confusion that cascades through underwriting, closing, and sometimes even post-closing compliance.

For a deeper look at how LOIs interact with seller financing structures, the Seller Notes Deep Dive episode covers the contract language that makes or breaks these deals.

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Equity Injection Math — Getting It Right the First Time

The SBA requires a minimum 10% equity injection on change-of-ownership deals. That part is simple. What's not simple is calculating the total project cost correctly and then sourcing the injection in a way the underwriter will accept.

Total project cost is not just the purchase price. It includes working capital needs, closing costs, any renovations or equipment included in the deal, and SBA guaranty fees if they're being financed. I've seen originators calculate 10% of the purchase price and call it done, only to have the underwriter come back and say "you're short by $40,000 because you forgot closing costs and working capital."

Here's the quick math framework I use:

| Component | Example | |---|---| | Purchase price | $650,000 | | Working capital | $50,000 | | Closing costs (est.) | $25,000 | | SBA guaranty fee (financed) | $18,000 | | Total project cost | $743,000 | | 10% minimum injection | $74,300 |

Acceptable sources: personal cash savings, 401(k) rollover (ROBS), documented gift funds, sale of personal assets, and — this is the big one — seller notes on full standby for at least 24 months.

What's not acceptable: borrowed money that creates new debt service. If the borrower took out a HELOC to cover their injection, the lender is going to see that additional payment obligation in the DSCR calculation, and it can kill the deal.

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Seller Note Mechanics and Standby Agreements

Seller notes are probably the most misunderstood element of SBA deal structuring. When a seller carries a note, the structural implications depend entirely on whether that note is on full standby.

Full standby means no payments — not principal, not interest — for at least 24 months. Some lenders require standby for the life of the SBA loan. A seller note on full standby counts toward the buyer's equity injection. That's a huge deal, because it reduces how much cash the buyer needs to bring to the table.

Not on standby means payments begin immediately. That note now becomes part of the debt service calculation. It increases the total monthly obligation, which reduces the DSCR. A note that was supposed to help the deal can actually hurt it if the standby terms aren't properly structured.

The psychology here matters too. Along those lines, a seller who is willing to carry a note is signaling confidence in the business. A seller who categorically refuses raises a question the credit officer is going to ask: why doesn't this person want any continued exposure to the business they're selling?

For the full mechanics of how seller financing works in SBA transactions, including secondary market options, our deal structuring guide walks through every scenario.

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DSCR Stress Testing — What Lenders Actually Model

Debt service coverage ratio is the number that determines whether a deal lives or dies in committee. The basic calculation is straightforward: take the business's adjusted cash flow (typically EBITDA plus owner's salary, minus a reasonable replacement salary) and divide it by total annual debt service (SBA loan payments plus any non-standby seller note payments plus other business debt).

Most lenders want to see 1.15x to 1.25x at minimum. But what I tell originators is this: don't just calculate the DSCR at today's rate. Stress test it.

What I stress test:

1. Rate increase: SBA 7(a) variable-rate loans are tied to Prime. What happens to your DSCR if Prime goes up 100 basis points? 200?
2. Revenue decline: What if revenues drop 10%? Does the deal still work?
3. Seller note comes off standby: If the seller note eventually requires payments, what does that do to debt service?
4. Working capital burn: If the buyer needs more working capital than projected, where does it come from?

If your deal barely clears 1.15x under perfect conditions, it's not going to survive committee pushback. I think the target should be 1.25x or better on the base case, with at least 1.10x even under stress scenarios. That gives you a margin of safety that makes the credit officer's job easier.

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When to Walk Away from a Deal

This might be the hardest skill to develop, and it's one that doesn't get taught enough. Walking away from a deal that won't close is not failure — it's discipline. Every hour you spend on a deal that was structurally broken from the start is an hour you could have spent on a deal that closes and pays you.

Here are the red flags that should make you seriously consider walking:

• DSCR under 1.10x even with favorable assumptions
• Buyer has no verifiable equity injection source and is hoping to "figure it out"
• Seller refuses any note and the buyer is already stretching on injection
• The business has declining revenues for 2+ years with no credible turnaround story
• The LOI has a purchase price that's wildly disconnected from earnings (paying 5x SDE for a business with no proprietary advantage)
• The buyer has no industry experience and the business requires specialized knowledge

I think the best originators develop a mental checklist they run within the first 10 minutes of looking at a deal. Can this borrower meet equity injection? Does the cash flow support the debt? Is there a structural path to approval? If two of those three are questionable, it's time for a hard conversation with the borrower — not three weeks from now, but today.

Understanding how to read these signals early is what originator training is really about. The product knowledge is table stakes. The judgment is the edge. And for deals where the equity gap seems impossible to close, our guide on 100% financing for business expansion covers the structures that make it work.

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FAQ

What are the most common SBA deal structuring mistakes?

The three I see most often: miscalculating total project cost (forgetting closing costs and working capital), not stress testing the DSCR, and submitting LOIs that are vague on key terms like allocation and seller transition. Each of these creates downstream problems that slow or kill the deal.

How does a seller note affect SBA deal structure?

It depends on standby status. A seller note on full standby (no payments for 24+ months) counts toward the buyer's equity injection, which reduces the cash needed. A seller note not on standby adds to debt service, which reduces DSCR. Getting the standby terms right is one of the most impactful structuring decisions in the deal.

What DSCR do SBA lenders actually require?

Most lenders require 1.15x to 1.25x minimum. Some are flexible down to 1.10x with compensating factors (strong borrower experience, substantial equity injection, excellent collateral). But the smart play is structuring for 1.25x+ so you have a buffer when the credit committee pushes back.

How do I learn SBA deal structuring beyond the basics?

Reading SOPs and guides gets you the framework. But the applied skill — knowing how to structure a deal that anticipates underwriting pushback — comes from practice, mentorship, and structured training. Our originator training at learn.lordsoflending.com covers deal structuring in Module 5 with real deal walkthroughs, equity injection worksheets, and DSCR stress testing templates that we use on our own transactions. It's the system we built because we couldn't find it anywhere else.

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Go Deeper

The eight structural failure points that kill SBA deals before they close are documented in Why Most SBA Deals Fall Apart. If you can recognize these patterns before you submit a package, you'll save weeks of work on deals that were heading for a wall.

For the seller note conversation in full — including why a seller's refusal to carry paper can be a red flag — Episode 15: Seller Notes Deep Dive is the most detailed discussion we've recorded on this topic.

And if you're buying a restaurant or food-service business, the structuring challenges are unique. Episode 14: Building a Successful Restaurant covers the economics, the three levers that determine survival, and what Seth Hannemann learned building a 14-location brand from a $300-a-day hole in the wall.

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This content is for educational purposes only and does not constitute legal, financial, or investment advice. Consult with a qualified attorney, CPA, and financial advisor before making business or financing decisions. Loan terms, rates, and programs are subject to change and vary by lender.