Big Story

Q&A: Ray Drew on Why the SBA 7(a) Loan Depends on the Lender

Ray Drew is an SBA lender with 15 years of experience in the banking system, working with small-business borrowers, bank teams, and SBA loan processes. The SBA 7(a) program is often explained as a government loan program, but Drew’s main point is that the bank still drives the loan. The SBA provides the guarantee, but the lender makes the loan, sets the terms, evaluates the borrower, and determines how smoothly the deal proceeds.

The biggest misconception is that the SBA lends the money directly. Drew explains that the SBA guarantees a portion of the loan, usually 75%, for participating lenders. That guarantee reduces the lender’s risk if the loan goes bad, which is what allows banks, credit unions, and licensed non-bank lenders to offer more flexible financing than a conventional bank loan. Longer repayment periods, lower down payments, and broader eligible uses all come from that guarantee structure.

That structure also explains why lender selection matters so much. Any participating bank or credit union operates within the SBA’s rules, but each lender builds its own SBA program, risk appetite, documentation process, and internal approval workflow. Two borrowers can pursue the same SBA 7(a) loan and have very different experiences depending on the lender. Drew’s view is that not all SBA loans are created equal because not all SBA lenders are equally competent, responsive, or comfortable with the same types of deals.

Drew notes that close to 80,000 small businesses used SBA 7(a) loans last year, representing more than $37 billion of capital. The program is used for business acquisitions, commercial real estate, construction, partner buyouts, debt refinancing, leasehold improvements, equipment, commercial vehicles, furniture and fixtures, inventory, and permanent working capital. That flexibility is why the 7(a) loan often becomes the default financing tool for owners buying, expanding, or recapitalizing a business.

Eligibility is broader than many owners assume, but there are still hard limits. A borrower generally needs to be a for-profit small business, and Drew emphasizes that most privately owned businesses qualify under the SBA’s size standards. The business must also comply with the SBA’s rules on ownership, prior federal loan defaults, and eligible business activity. Passive rental real estate, speculative activity, gambling, marijuana-related businesses, investment real estate, and personal cash-outs fall outside the program.

The loan terms depend on what is being financed. SBA 7(a) loans can go up to $5 million. Commercial real estate and construction can stretch to 25 years. Business acquisitions, partner buyouts, leasehold improvements, furniture, fixtures, and working capital are generally structured around 10-year terms. Equipment can fall between 10 and 25 years depending on useful life. If real estate represents at least 51% of the use of proceeds, the full loan may qualify for a 25-year term. If not, the lender may blend terms.

The borrower’s own commitment is another key part of the underwriting story. SBA rules require a minimum 10% equity injection in certain cases, including business acquisitions, startups, some partner buyouts, and partial ownership changes. For other projects, such as an existing business buying owner-occupied commercial real estate, the lender has more discretion. Collateral is also part of the process. The lender takes a lien on financed assets and may also look to personal real estate if the business collateral does not fully secure the loan. Anyone owning 20% or more of the business typically must personally guarantee the loan.

Pre-approval can take 1 to 10 business days. Packaging can take 2 to 15 business days. Underwriting can take 5 to 15 business days. Decisioning can take 1 to 5 business days. Closing can take 20 to 40 business days. Third-party diligence often runs in parallel, with appraisals taking 3 to 4 weeks, environmental reports taking 1 to 4 weeks, and business valuations taking 1 to 2 weeks. In total, Drew frames the full SBA 7(a) process as roughly 29 to 75 business days, or about 6 to 15 weeks.

The lesson is that the SBA 7(a) loan is not a single product with a single borrower experience. It is a government-guaranteed lending framework delivered through individual lenders, and the lender’s competence can determine whether the process feels manageable or painful. Borrowers need to understand eligibility, eligible uses, terms, fees, equity requirements, collateral, guarantees, documents, and timing, but the bigger decision is choosing a lender that knows how to move the file forward. The SBA guarantee opens the door, but the lender decides how well the deal gets done.

Governance Feed

1. Most lower-middle-market deals that collapse do so through a slow erosion of trust rather than a single fight over price. When a seller delays responses, misses deadlines, or lets performance slip during the sale, buyers read it as risk and start to question the business. Quick answers, consistency, and follow-through on small commitments maintain momentum and give both sides room to work through the surprises.

2. A large share of small-business buyers in 2026 have never owned a company before, and they behave differently during a deal. First-time buyers are more likely to be rattled by routine diligence findings, to overestimate how difficult the post-close process will be, and to let financing challenges shake their confidence. Sellers who understand that pattern can pace disclosure, answer calmly, and keep a nervous but serious buyer engaged in the process rather than watch them walk away.

3. Sellers want to guard their customer list, pricing, and the fact that the business is for sale, while buyers need real access to confirm the company is sound, and that tension runs through every process. The workable answer is staged disclosure, where less sensitive material comes early, and customer or key-employee conversations wait until late diligence under the exclusivity period, with data room access limited by role and stage. That protects the seller without starving the buyer of what they legitimately need.

4. The purchase price understates what a buyer actually has to fund, and the gap shows up right after closing. Deferred maintenance on equipment, vehicles, or systems the seller never paid for can add hundreds of thousands in the first year, and a thin closing balance sheet can force revolver draws before the first collection cycle. Buyers who budget only to the headline number, rather than maintaining a working capital reserve and a year-one capital plan, watch the cost climb well above what they signed for.

Thesis Principle

Add-backs can raise EBITDA on paper, but they only hold value when a buyer can verify that the expense is personal, above-market, or truly non-recurring. Owner benefits, above-market salaries, one-time legal fees, related-party rent, and accelerated depreciation may all be defensible, but each requires clean documentation and a realistic view of how a buyer will normalize the numbers. The strongest add-backs are backed by payroll records, invoices, lease agreements, tax schedules, market salary data, or clear proof that the cost will not continue after closing. The weaker ones depend on judgment: partial vehicle use, family compensation, recurring advisory fees, or expenses that look personal to the seller but operational to the buyer.

Resources & Events

📅 Operating Partners Forum New York (New York, NY - October 19-21, 2026)

Hosted by PEI Group, the Operating Partners Forum New York brings together business operators, portfolio company executives, investors, and advisors focused on improving performance after an acquisition closes. Discussions span operational excellence, leadership development, technology adoption, talent strategy, and growth initiatives across a wide range of businesses. For owners considering a future transition, it offers valuable insight into the operational priorities buyers often focus on once a deal is complete. Details →

📅 PDI New York Forum 2026 (New York, NY - September 15-16, 2026)

Hosted by Private Debt Investor, the PDI New York Forum brings together lenders, investors, advisors, and business finance professionals to discuss capital deployment, direct lending, acquisition financing, and trends shaping the private credit market. The event combines market-focused content with structured networking opportunities, providing useful insights into how growth initiatives, ownership transitions, acquisitions, and recapitalizations are being financed in today's market. Details →

📊 Report Spotlight: Q1 2026 US PE Middle Market Report (PitchBook) 

PitchBook's Q1 2026 US PE Middle Market Report provides a detailed look at dealmaking, valuations, exits, and financing conditions across the middle market. The report examines how private equity firms are navigating a market characterized by selective lending, elevated valuation expectations, and continued competition for quality businesses. It also tracks trends in deal volume, hold periods, exit activity, and capital deployment, offering a useful snapshot of the forces shaping transactions across the lower and middle market. For business owners considering a future transition, the report provides valuable context on how buyers are approaching acquisitions, where capital is being deployed, and what market conditions may mean for valuation and deal certainty in the months ahead. Read → 

For the Commute

Spread vs Commission Model Explained (Acquisitions Anonymous)

The hosts break down a business brokerage that is itself being sold. The company claims 230+ completed deals, a 92-94% close rate, and 85 closings in the past year. The panel digs into the mismatch between the stated revenue, EBITDA, transaction math, and $14.5 million asking price, with the skepticism centered on whether a buyer would be acquiring scalable infrastructure or simply paying a rich multiple for a brokerage job with fragile deal flow. The episode’s core takeaway is that service businesses built around deal flow need to be valued differently from software or infrastructure companies. A spread-based pricing model may create upside, but unless the brokerage has repeatable sourcing, transferable relationships, and a process that works beyond the founder or key brokers, a buyer may simply be paying $14.5 million for a demanding job.