Article by Roger Schlueter, MBA
Equity Injection for SBA Guaranteed Loan (Information for this Article was taken from the SBA SOP 50 10 (5) on pages 188 to 190.)
Amount of Equity Injection – The SBA usually lets the bank set the amount of equity but the SBA will set Ten Percent as a Minimum.
Source for Equity Injection
1) Cash – Cash is King
2) Cash – Borrowed under the following Rules
– Personal Credit for Injection into Business may be allowed if it can be shown that repayment will be made from sources other than The Cash Flow of the Business (Salary of Borrower from Business being financed does not qualify).
– The Lender must disclose Loans made to the individual for injection as equity into the business. The Lenders Credit Analysis must show what impact the loan has on Business and Personal Balance Sheets and Sources of Repayment. If the Bank providing the Personal Loan is also the Participating Lender then the Bank must submit the Application though the Standard SBA 7a Processing.
3) Assets other than Cash
– Assets will be valued through an appraisal or independent third party. This is required if the Valuation is Greater than Depreciated Value. Usually if the asset is equipment the borrower can use a letter valuing the equipment. This letter must be from someone or some company that sells or distributes this equipment like a supplier.
– The SBA may use Equity that a Borrower has in his current business if he is an Existing Business. This has to be Approved by SBA.
4) Standby Debt
– Owners Debt or Debt Due to the Owner may be considered Equity if it is on “Full” Standby (full standby means the owner cannot receive any payment of principal or interest on the loan). Partial Standby allowing Interest Payments may be allowed if the business has “Adequate Historical Business Cash Flow Available to Make the Payments”. You will have to attach a copy of the Note to the Standby Agreement.
The Following is Not Considered Equity:
– Value or Cost of Education
– Borrowed Funds that Do Not Meet the Previous Guidelines
Documentation of Equity Injection
– The Best Documentation of a Equity Injection is Money Given to the Bank, and then Allowing the Bank to Disburse All Funds for the Project including the Equity Portion.
– The Bank should also show copies of the Borrowers Bank Statements for the Previous Two Months or More that Document the Equity’s Existence.
– If the Business Expends the Funds, the Checks for the Amounts and the Checks of the Money going into the Company as Equity Should be Provided.
– This Documentation is needed by the Bank to Ensure that the SBA Honors It’s Guarantee. Most Banks will be Very Particular about the Dispursal of SBA Funds and the Amount of Equity Coming from the Borrower and put into the Business.