When it comes to acquiring a business, most entrepreneurs immediately think of SBA 7(a) loans as their go-to financing option. However, many believe these loans cap their funding at $5 million, limiting their ability to pursue larger deals. What if I told you there’s a powerful strategy to combine SBA 7(a) loans with conventional financing to unlock multi-million dollar business acquisitions—without giving up equity? This article dives deep into the pari passu loan structure, a creative and effective way to finance $8 million to $12 million business purchases, and beyond.
As a Business Ownership Coach and host of the Investor Financing Podcast, I’ve seen firsthand how savvy buyers leverage this approach to bridge the financing gap and close deals that once seemed out of reach. Whether you’re in the midst of negotiating a Letter of Intent (LOI) or just starting to explore your options, understanding pari passu loans can be a game-changer for your acquisition journey.
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Understanding the $5 Million to $10 Million Financing Gap
The market for financing larger business acquisitions has a significant void between $5 million and $10 million. SBA 7(a) loans currently cap out at $5 million, which means that for many deals priced above this threshold, buyers face a funding ceiling.
There are ongoing proposals to increase this limit, potentially allowing SBA 7(a) loans to reach $10 million in some industries. This would be a welcome change and would help close the gap in the market. However, until that becomes a reality, buyers must get creative to secure financing for businesses priced between $5 million and $12 million or more.
Businesses in this price range are often classified as mid-sized—they’re too large for small business loans but not quite at the scale institutional investors typically target. This creates a unique financing challenge, but also an opportunity for well-qualified buyers who understand how to structure deals effectively.
What Is Pari Passu Lending and How Does It Work?
One of the most effective ways to close larger transactions is through a pari passu loan structure. Pari passu, a Latin term meaning “equal footing,” refers to two loans that share the same priority position on the collateral. In practical terms, this means both the SBA 7(a) loan and a conventional loan take a senior lien position on the business assets.
Typically, the SBA 7(a) loan will cover up to $5 million—the current SBA maximum—while the conventional loan fills in the gap, often ranging from $2 million to $5 million, depending on the deal size. Both loans are made concurrently by the same bank or lending institution, allowing for streamlined approval and servicing.
This structure is particularly attractive because it allows buyers to maximize their borrowing capacity without diluting equity or requiring extensive collateral beyond the business itself. Essentially, you’re leveraging two senior loans to finance a larger acquisition while maintaining ownership control.
Who Provides Pari Passu Loans and Why?
Most pari passu loans are provided by banks, especially those with preferred lender status under the SBA 7(a) program. These banks have the authority to approve SBA loans directly and often have established conventional loan programs that complement SBA financing.
It’s rare for two separate lenders to offer the SBA and conventional loans independently in a pari passu deal. Usually, the same bank issues both loans to maintain control over the transaction and simplify the process for the borrower.
While some smaller banks may have specific guidelines or limitations, many mid-sized to large banks actively seek to fill this financing gap as demand grows. They recognize that many buyers are targeting main street businesses priced above $5 million, and pari passu structures allow them to serve this niche effectively.
Creative Deal Structures for Larger Business Acquisitions
In many cases, buyers need to get creative with their deal structures to make larger acquisitions work. One common approach involves combining a $5 million SBA 7(a) loan with a conventional loan between $2 million and $3 million, plus an equity injection from the borrower and potentially an investor partner.
For example, a $10 million acquisition might be structured as follows:
- $5 million SBA 7(a) loan
- $2 million conventional loan
- $1 million equity injection (borrower + investor partner)
- $2 million seller carry (seller financing)
This blend of financing sources helps bridge the gap without requiring the buyer to give up equity or rely solely on collateral. Seller carrybacks can also be instrumental in closing deals by allowing sellers to finance a portion of the purchase price.
Some lenders require collateral tied to the loan, often in real estate, but there are lenders we work with who don’t require collateral beyond the business itself. This flexibility further opens the door for buyers with strong business cash flow and financials.
The Future of SBA Loan Limits and Larger Acquisitions
There is positive momentum toward increasing SBA 7(a) loan limits from $5 million to $10 million in certain industries and potentially across the board. When that happens, pari passu loans will likely be used to finance even larger deals—possibly $15 million to $20 million transactions.
While this change is still a way off, it signals a growing recognition of the need to support mid-sized business acquisitions. Buyers who position themselves now with creative financing structures and strong lender relationships will be best positioned to capitalize on these expanded opportunities.
How We Help You Navigate Pari Passu Deals and SBA Financing
If you’re currently working on an LOI for a business acquisition that requires pari passu financing, I encourage you to reach out for expert guidance. We have strong relationships with lenders who specialize in these deals and know how to navigate the complexities to get your loan approved.
In one recent deal, the borrower approached two banks directly and was close to approval but got stuck on a few key issues. By stepping in, we identified the roadblocks and secured the loan commitment, helping the buyer close the transaction on favorable terms.
Our services include SBA 7(a), SBA 504, USDA, BNI, and several state guarantee programs. Whether you’re acquiring a small franchise or a multi-million dollar business, we can tailor a financing strategy that fits your needs and goals.
Visit bookwithbo.com to schedule a consultation and explore your financing options with a seasoned Business Ownership Coach who understands the nuances of pari passu loans and SBA financing.
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Conclusion
As a Business Ownership Coach and host of the Investor Financing Podcast, I’ve seen the transformative impact of combining SBA 7(a) loans with conventional financing through pari passu structures. This approach unlocks the ability to acquire businesses well beyond the $5 million SBA loan cap, opening doors to $8 million, $10 million, and even larger deals without sacrificing equity.
The key to success lies in understanding the financing gap, working with the right lenders, and creatively structuring your deal with equity injections and seller financing. While the SBA loan limits are expected to rise in the future, now is the time to position yourself and leverage these strategies.
If you’re ready to take your business acquisition goals to the next level, I’m here to help. Schedule your funding strategy call today at bookwithbeau.com and get expert guidance on SBA and conventional loan options tailored to your unique situation.
Remember, smart financing is the foundation of successful business ownership—let’s build yours together.