Crafting a Strong Sources and Uses Statement for Your Business Acquisition
When buying a business, one of the most critical documents you'll prepare is your sources and uses of funds statement. This financial roadmap is essential for securing approval from lenders—especially when pursuing SBA 7(a) loans. The statement demonstrates that you've thoroughly planned your acquisition financing, understand your capital needs, and have a realistic strategy for deploying funds.
What Is a Sources and Uses Statement?
A sources and uses statement breaks down two fundamental questions:
Uses detail how you'll spend the capital raised. Typical use categories include:
- Purchase price of the target business
- Equipment, technology, or facility upgrades
- Inventory replenishment
- Working capital reserves
- Legal, accounting, and due diligence fees
- Closing costs and title insurance
- Contingency fund for unexpected expenses
Sources outline where your money originates. Common funding sources are:
- Your personal equity injection
- SBA 7(a) loan proceeds
- Seller financing (seller note)
- Outside investor equity
- Conventional bank loans or lines of credit
The fundamental rule is simple: total sources must equal total uses. Any gap reveals how much additional financing you still need to secure.
Why Lenders Require This Document
Commercial lenders and SBA-approved lenders scrutinize your sources and uses statement because it reveals how seriously you've analyzed the deal. A well-organized statement signals that you understand your capital requirements and have thoughtfully structured your acquisition financing to minimize risk.
For SBA loans specifically, lenders use this document to verify that:
- You're contributing sufficient personal equity (typically 10–20%)
- Your loan request is appropriately sized
- You've incorporated seller financing or other subordinated debt where applicable
- All proposed uses align with SBA guidelines
The Typical SBA 7(a) Acquisition Structure
Most business acquisitions financed through SBA programs follow a predictable capital stack:
- 10–20% borrower equity – Your personal cash investment demonstrates commitment
- 70–80% SBA 7(a) loan – Primary financing vehicle with favorable terms (typically 10-year amortization)
- 0–20% seller financing – Owner carryback that reduces lender exposure and signals confidence in the business
This balanced structure keeps your out-of-pocket cash requirements manageable while satisfying lender requirements for adequate equity injection and risk sharing.
Building Your Statement Step-by-Step
Step 1: List All Uses Begin by documenting every anticipated cost. Work with your business broker or acquisition advisor to ensure nothing is overlooked. Common categories are listed above, but don't forget less obvious costs like permits, training, or systems migration.
Step 2: Identify Your Funding Sources Realistically assess what capital you can contribute personally. Then determine how much you need to raise through lending or other means. Be conservative with assumptions about seller financing—don't assume the seller will carry debt unless you've already negotiated terms.
Step 3: Ensure Alignment with SBA Eligibility Rules Not all uses are eligible under SBA guidelines. Allowable uses include:
- Acquisition of business assets and goodwill
- Working capital and inventory
- Leasehold improvements
- Debt payoff (in specific circumstances)
Prohibited uses generally include:
- Earn-out payments to the seller
- Consulting or advisory fees beyond reasonable transaction costs
- Debt repayment unrelated to the acquisition
- Owner distributions
Step 4: Calculate Your Debt Service Coverage Ratio According to SBA Standard Operating Procedures, the acquired business must demonstrate a DSCR of at least 1.15x by year two post-acquisition. Your sources and uses should reflect investments in working capital, equipment, or operational improvements that enhance the business's ability to service debt. Lenders will stress-test the business's cash flow projections against your proposed capital structure.
Common Financing Combinations
While the traditional SBA structure works well for many buyers, alternative approaches exist:
SBA 7(a) Dominant Deal Maximize SBA loan proceeds with minimal equity injection. Works best for established businesses with strong cash flow and lower leverage concerns.
Seller Financing Heavy Structure a larger seller note (20–30% of purchase price) if the seller is motivated and confident in the business. This reduces bank exposure and often improves your approval odds.
Hybrid with Outside Equity Bring in passive investors or partners to supplement your personal equity, allowing you to preserve personal assets while still meeting SBA equity requirements.
Equipment Financing Supplement Use separate equipment or SBA 504 loans to finance real estate or equipment separately, freeing up SBA 7(a) capacity for working capital and other needs.
Preparing for Lender Review
When you present your sources and uses statement to potential lenders:
- Use clear formatting – Create a simple two-column spreadsheet: uses on the left, sources on the right
- Include supporting detail – Provide backup documentation for major line items (purchase agreement, equipment quotes, rent estimates)
- Show realistic assumptions – Conservative estimates are better than optimistic ones; lenders respect due diligence
- Discuss contingencies – Explain how you'd fund unexpected costs without derailing the acquisition
The Bottom Line
Your sources and uses statement is far more than a checklist—it's a strategic document that demonstrates your readiness to acquire and operate a business successfully. A thoughtful, well-researched statement inspires lender confidence and puts you on the path to closing.
At Cassian, we help business buyers develop acquisition financing strategies that work with SBA lenders and alternative lenders alike. Whether you're structuring your first deal or your fifth, our marketplace connects you with experienced lenders who understand sources and uses analysis and can provide clear guidance on what's needed for approval.