If you’re a small business owner considering selling your company and have an active SBA (Small Business Administration) loan, you might be wondering how that affects the process.
The good news is: yes, you can sell your business if you have an SBA loan, but there are specific steps you must take to remain compliant and ensure the transaction proceeds smoothly.
In this article, we’ll cover what you need to know to sell a business with an outstanding SBA loan, what challenges you might encounter, and how to prepare for a successful sale:
Understanding SBA Loans and Their Implications
SBA loans, including the popular SBA 7(a) and 504 loan programs, are partially guaranteed by the government and issued by participating lenders. They’re commonly used to finance business purchases, equipment, working capital, or real estate.
However, when you have an SBA loan, you’ve entered into a legally binding agreement with your lender. That means certain actions, especially major ones like selling your business, require the lender’s consent. It often requires the SBA’s approval as well, depending on the size and structure of the loan.
While you can sell your business with an outstanding SBA loan, you must follow SBA and lender protocols. You cannot simply transfer ownership and walk away; the SBA wants to ensure that any business sale protects the integrity of the loan, including guarantees and repayment obligations.
Here are the main conditions and steps involved:
Notify Your Lender Early
Your first move when planning to sell is to contact your lender. They’ll review the terms of your loan and let you know what documentation is required to move forward.
Each SBA loan agreement has clauses that cover business transfers or sales. Your lender can clarify what steps need to be taken to stay in compliance.
Get A Business Valuation
Most lenders will require an independent business valuation to confirm the sale price is fair and reflects market value. This protects the buyer, the seller, and the lender. In some cases, the SBA itself my require the valuation, especially if the loan balance is high or the buyer intends to assume the loan.
Structure the Deal Properly
There are typically two ways to structure the sale when an SBA loan in involved:
Buyer Assumes the Existing SBA Loan: This is possible, but relatively rare. The buyer would need to meet the same underwriting requirements as you did, including credit worthiness, management experience, and financial documentation. The lender must approve the assumption in order for this to move forward.
Proceeds from Sale Pay Off the SBA Loan: This is the more common choice, as the sales proceeds are used to pay off the remaining SBA loan balance at closing. The lender typically requires that all liens be satisfied as part of the transaction, as well. If the sale price doesn’t fully cover the debt, you may need to negotiate terms or bring cash to closing.
Get Lender and SBA Approval (When Required)
If more than 50% of the business is being sold, SBA standard operating procedures may require prior written consent from the SBA, especially if:
The loan balance exceeds $250,000
The buyer is not assuming the loan
The sale is not structured as a complete buyout
In these cases, the lender submits a request to the SBA, including the drafted purchase agreement, valuation report, and buyer financials. This review process can take several weeks, so be sure to plan accordingly if SBA approval is required.
Release of Personal Guarantees
When you took out your SBA loan, you most likely signed a personal guarantee, which means you remain personally reliable for the loan unless it is paid off or the buyer assumes it (with lender approval). If the loan is paid in full at closing, your personal guarantee is released. If the buyer assumes the loan, you must make sure that the lender formally releases you from that obligation.
Plan for the Transition
Buyers and lenders will want to see that the business can continue to operate smoothly after the sale. Preparation plays a critical role in achieving a successful sale and a smooth transition. Creating training manuals, documenting key processes, and other preparations will help ensure a seamless handover. A solid transition plan also reflects the professionalism of your operation and reduces concerns, on both the buyer’s and the lender’s part, about potential disruptions when handing over the reins.
Selling your business with an outstanding SBA loan is entirely possible, but it requires clear communicaiton, lender cooperation, and careful planning. The process involves more moving parts that a typical sale, but with the right team–your lender, a business broker, and potentially an business attorney–you can navigate the sale confidently.
As experienced business brokers, our team at The FBB Group has helped many owners sell business while managing the complexities of SBA loans. To see how we can help you through the business transaction process–from preparations to final closing– contact us online today.