Family Business Succession Loan Calculator: SBA, Seller Note, Conventional

Example 1: $750K business, $75K buyer cash, SBA 7(a) primary

• SBA loan: $675,000 over 10 years at 11% APR
• Monthly payment: ~$9,300
• Total interest over 10 years: ~$443,000
• Total cost (loan + interest): ~$1,118,000 against $750K purchase

Example 2: $750K business, $75K cash, SBA + 20% seller note blend

• SBA loan: $525,000 over 10 years at 11% APR
• Seller note: $150,000 at AFR mid-term ~5%, on standby for SBA term
• Monthly SBA payment: ~$7,230
• Why it helps: lower SBA balance reduces monthly outflow, parent receives interest income at AFR.

Example 3: $750K business, $225K cash, conventional 7-year loan

• Bank loan: $525,000 over 7 years at 9% APR
• Monthly payment: ~$8,440
• Total interest over 7 years: ~$184,000
• Why it works: stronger buyer cash position, faster closing, lower total interest because of shorter term.

How do I finance buying a family business from a parent?

Three primary structures fit family-to-family transfers. SBA 7(a) handles the full transaction with 10 percent buyer down and 90 percent loan for qualified buyers, with the SBA explicitly permitting parent-to-child sales as long as the parent does not retain ownership and the buyer signs the standard equity-injection certification. SBA-plus-seller-note structures use a smaller SBA loan plus a seller note from the parent (often at IRS Applicable Federal Rate). Conventional bank financing works when the buyer can put down 25 to 30 percent and has strong credit.

Can I use an SBA loan to buy a business from my parent?

Yes. SBA SOP 50 10 explicitly permits family transfers under the 7(a) program, with two key conditions. First, the seller (parent) must completely sever ownership and economic interest, with limited transition consulting permitted but no continuing equity. Second, the buyer must inject the standard 10 percent equity from verified personal funds. Some SBA preferred lenders are more comfortable with family transfers than others; choose a PLP lender with documented family-transfer experience.

What interest rate should I use for a seller note in a family transfer?

For tax purposes, the IRS requires seller notes between family members to carry at least the Applicable Federal Rate (AFR) for the relevant term to avoid the note being recharacterized as a partial gift. AFRs are published monthly at irs.gov/applicable-federal-rates and have three categories: short-term (under 3 years), mid-term (3 to 9 years), and long-term (over 9 years). Mid-term AFR is most common for family transfers because typical seller notes run 5 to 10 years. The market rate for non-family seller notes is typically 6 to 9 percent.

How much down payment is required for a family business succession?

SBA 7(a) typically requires 10 percent buyer-injected equity from verified personal funds. SBA-plus-seller-note structures sometimes substitute part of the equity injection with a fully subordinated seller note on standby for the SBA loan term, which can reduce the buyer's cash requirement. Conventional bank loans for family transfers usually require 25 to 30 percent down. Family loans (informal lending from other relatives) can supplement the down payment but are scrutinized by lenders for documentation and gift-letter compliance.

What are the tax implications for the parent selling to the child?

The selling parent owes capital gains tax on the difference between the sale price and the seller's tax basis in the business, taxed at long-term capital gains rates (typically 15 to 20 percent federal plus state). Selling below fair market value can be partially treated as a gift, potentially triggering gift tax above the lifetime exemption. Installment sales (where the parent receives payments over multiple years) spread the capital gains tax across the payment years, which can lower the marginal rate. A CPA review before closing is essential.

Should I use SBA 7(a) or conventional financing for a family transfer?

For most family transfers, SBA 7(a) wins on terms (10 percent down, 10-year amortization, rate-capped pricing) but loses on speed (60 to 90 days versus 30 to 45 for conventional). Choose conventional when the buyer has strong banking relationship capital, substantial collateral, and needs to close fast. Choose SBA when the buyer has limited cash, the business carries goodwill that makes conventional underwriting difficult, or when the parent and child want a longer amortization to keep monthly payments lower.