SBA equity injection sources: what a lender can count
Short answer
SOP 50 10 8.1 splits equity into two kinds. Unlimited sources (your unborrowed cash, gifts, grants with no repayment, verified prepaid project costs, and personal loans repaid from outside the business) can make up the whole injection. Limited sources (standby debt, seller notes on full standby, and minority investors under 20%) can make up no more than half of it. Fees to brokers or advisers never count.
The amount of equity is the easy part: 10% of total project cost on most acquisitions. Whether a given dollar counts is where deals slow down. Here's the rule set in Appendix 15 of SOP 50 10 8.1 and how lenders apply it.
Two buckets
Unlimited sources in detail
- Cash that isn't borrowed, on the business's balance sheet or from other sources, including gifts. Lenders will look at bank statements for the period they specify and ask about large recent deposits.
- A personal loan to a guarantor where repayment can be shown to come from a source other than the business's cash flow. The owner's salary from the business doesn't qualify. A home equity loan repaid from a spouse's W-2 income is the classic example. See home equity for the down payment.
- Grants with no conditional repayment, clawback or other provision that could require repayment during the 7(a) loan's term.
- Eligible prepaid expenses verified with paid invoices, canceled checks or bank statements, such as a purchase deposit or valuation and QoE fees. The SOP says money the applicant spends on the required due diligence reports can count toward the injection.
Limited sources in detail
- Seller debt on full standby: subordinated to the lender and with no payments of principal or interest for the term of the 7(a) loan. Interest may accrue and be paid after the SBA loan is repaid. See seller financing rules.
- Other standby debt: same full-standby terms on SBA Form 155 or the lender's equivalent; the standby creditor subordinates its liens and can't take an equity stake in the business.
- Non-controlling minority investors: under 20% equity, no control, and no agreement to repay or make distributions to recover the investment before the SBA guaranty is released. While their money counts toward the injection, distributions other than for the investor's tax on the business's income are prohibited until the 7(a) loan is paid off.
There's a second use for limited sources: when the price exceeds what the valuation and QoE support, extra limited-source funds can bridge it, but they must be on full standby.
Worked example of the half cap
Illustration, not a real deal
Say total project cost is $2,200,000, so the required injection is $220,000. You have $90,000 of cash, the seller will put $100,000 on full standby, and a friend wants to invest $60,000 for 10%.
| Source | Bucket | Counts toward $220,000 |
|---|---|---|
| Your cash | Unlimited | $90,000 |
| Seller standby note | Limited | $110,000 combined maximum (half of $220,000) |
| Friend's investment | Limited | |
| Total counted | $200,000, $20,000 short |
The limited sources total $160,000 but only $110,000 can count. You'd need $20,000 more from an unlimited source (your cash or a gift), or a lower project cost. The extra $50,000 of limited money can still go into the deal; it just doesn't satisfy the minimum.
When the 10% can be lower
Business Expansions and Owner Buyouts can have the requirement reduced or eliminated by the lender if the business has sufficient liquidity and working capital and no negative net worth at the last fiscal year-end. If eliminated, no dedicated permanent working capital can go into a 7(a) term loan for 90 days (de minimis amounts allowed). ESOPs buying 51% or more have no SBA equity requirement. Initial Acquisitions: no reduction. See no-down-payment SBA loans.
Documents to have ready
- Bank and brokerage statements covering the period the lender asks for.
- Gift letter stating the money isn't a loan, plus the transfer record.
- For a personal loan: the note and proof of the outside repayment source.
- Paid invoices for any prepaid expenses you want counted.
- Draft standby agreement and seller note.
- Investor subscription terms showing ownership under 20% and no repayment rights.
Buyers planning their down payment can start with OKtoBuy's SBA equity injection guide.
Gift funds
Yes. SOP 50 10 8.1 lists cash that isn't borrowed, "whether on the business's balance sheet or from other sources (e.g. gift)," as an unlimited equity source, so a genuine gift can cover your whole 10% injection. It has to be a real gift with no repayment expected; money a relative expects back is a loan, and a loan only counts if it's repaid from a source other than the business.
Family money is one of the most common ways first-time buyers reach the 10%. Done properly, SBA treats it the same as your own savings.
Gift vs loan vs investment
| If the money is... | SBA treats it as | Counts toward 10%? |
|---|---|---|
| A gift, no repayment, no ownership | Unlimited source | Yes, in full |
| A loan to you repaid from outside income (not the business) | Unlimited source | Yes, if repayment source is shown |
| A loan repaid from the business | Not equity | No |
| An investment for under 20%, no control | Limited source | Yes, within the half cap, with distribution limits |
| An investment for 20% or more | Owner and guarantor | As their equity, with guaranty |
What the lender will want
- The signed gift letter.
- Proof of the transfer: the donor's statement showing the withdrawal and yours showing the deposit.
- Sometimes evidence the donor had the funds (a statement before the transfer).
- Timing that makes sense: large unexplained deposits shortly before applying get questions.
Common mistakes
- Calling it a gift while privately agreeing to repay it. That misstates equity to a federal program lender.
- Promising the donor a share of profits. That makes them an investor.
- Depositing cash with no paper trail.
Other ways to fund equity: home equity, ROBS and seller standby notes.
Home equity loans
Yes, with a condition. SOP 50 10 8.1 counts cash from a personal loan to a guarantor as an unlimited equity source only when repayment can be shown to come from a source other than the business's cash flow, and your salary from the business doesn't qualify. A home equity loan repaid from a spouse's income, a pension or other investments can work; one you plan to repay from what the business pays you can't.
For many buyers, home equity is the biggest pool of money they have. SBA lets you use it, but tests where repayment will come from.
The test
A worked example
Illustration, not a real deal
Say you need $150,000 of equity. You take a $150,000 home equity loan at an assumed 8.5% over 15 years, about $1,477 a month or $17,700 a year. Your spouse earns $95,000 a year from a job unrelated to the business. The lender can count the $150,000 as equity if your household budget shows the $17,700 is covered by your spouse's income after your other obligations. That same payment goes into global cash flow.
Knock-on effects
- Collateral: the new loan reduces equity in your home. If remaining equity falls below 25% of fair market value, SBA doesn't require the acquisition lender to take it, which can matter for a collateral shortfall.
- Global cash flow: the payment is a personal obligation that must be covered 1:1 globally.
- Timing: arrange it before you need it; a fresh loan on your credit report will be asked about.
- Risk: your house now backs both the equity loan and, possibly, the SBA loan. Be sure you're comfortable with that.
See SBA equity rules and collateral requirements.
Common questions
How do lenders verify my equity?
With bank statements showing the funds are yours and not borrowed (or a gift letter and transfer for gifts), paid invoices or canceled checks for prepaid expenses, and the standby agreement and note for any seller standby debt.
Can an investor's money count as my equity?
Yes, if the investor holds under 20%, has no control, and the investment isn't subject to repayment or distributions (other than for taxes) before the SBA guaranty is released. It's a limited source, so it shares the half cap with standby debt.
Does equity have to be in the business before closing?
The lender must verify it's injected, usually at or before closing. Prepaid expenses, such as a deposit or report fees, count if documented.
Can I use equity in a building I'm contributing?
Contributed assets can be considered in some situations; discuss with the lender. The SOP's listed unlimited sources focus on cash, grants and verified prepaid expenses.
What should a gift letter say?
The donor's name and relationship, the amount, the date, and a clear statement that it's a gift with no expectation of repayment and no ownership stake in return. Your lender may have its own form.
Related guides
Sources
This guide explains rules and practice in plain English. It isn't legal, tax or credit advice, and SBA and IRS rules change. Check the current SOP, regulations and your lender's requirements before you rely on anything here. Examples with made-up businesses are illustrations, not real deals.