SBA rules · SOP 50 10 8.1
Can an investor provide the down payment for an SBA loan?
Yes, an investor can provide the equity injection as an equity contribution, a non-borrowed gift, or a qualified loan, subject to SBA eligibility terms, caps, and guaranty rules.
Quoted from SBA SOP 50 10 8.1Every quote checked word for word
In detail
- Equity ownership stake: An investor may contribute capital in exchange for equity provided the investment is not subject to an agreement to repay equity or recover the investment prior to release of the SBA guaranty. Any investor owning 20 percent or more must provide a full unlimited guaranty, and an agreement giving a non-guarantor investor control of the business makes the applicant ineligible.
- Change of ownership equity cap: In a 7(a) change of ownership, a non-controlling minority equity investment (less than 20 percent equity and no control) is a limited equity source that can provide no more than half of the required equity injection. Furthermore, distributions to that investor are prohibited until the 7(a) loan is paid off, except for distributions made solely to satisfy tax obligations attributable to the business's income.
- Gifts: Cash from a gift is an eligible unborrowed source of equity injection, but a gift letter alone is never sufficient verification. The lender must obtain at least 30 days of bank statements showing the donor had the funds available, evidence of the processed check or wire transfer, and proof of deposit into the borrower's account or escrow.
- Investor debt: If an investor lends money personally to an owner or guarantor, it qualifies as equity only if repayment is demonstrated to come from a source other than the business's cash flow or owner salary. If the debt is owed by the business, it qualifies as equity only if placed on full standby with no principal or interest payments for the entire loan term; in an acquisition, standby debt cannot exceed half the required injection, and the standby creditor cannot take an equity stake.
- Borrowed injection for 504 loans: For 504 projects, the borrower contribution may be borrowed if subordinated to the Third Party Loan and 504 debenture. If secured by project property, it cannot be repaid faster than the 504 loan without SBA written approval; if secured by other assets, repayment must be demonstrated from business cash flow or other sources.
The source
What the SOP says
“An equity investment not subject to an agreement to repay equity or make distributions to recover an investor’s investment prior to release of the guaranty.
“Businesses that have entered into an agreement for control (including a side agreement) that gives a non-guarantor owner/investor control of the business are ineligible.
“The following sources, whether individually or in the aggregate, may provide no more than half of the required Equity Injection.
“To qualify as a Non-controlling Minority Equity Investor, the investor must have less than 20% equity in and exert no control over the operating business.
“When Equity Investments are used to meet the equity injection requirements, distributions to the investor that are not made solely for the purpose of satisfying the investor’s tax obligations attributable to the business’s income are prohibited until the 7(a) loan has been paid off.
“A promissory note, “gift letter,” or financial statement is not sufficient evidence of cash injection without corroborating evidence consistent with Subparagraph f. i. immediately above.
“Cash that comes from a personal loan where repayment can be demonstrated to come from a source other than the cash flow of the business (the salary paid to the owner by the business does not qualify).
“The provider of standby debt may not take an equity investment in the business.
“Only in situations where the borrowed contribution is collateralized by the Project Property, Borrower may not pay the loan for its contribution at a faster rate than the 504 loan (13 CFR § 120.912) unless it is approved in writing by the D/FA or designee;
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More on down payment
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This page quotes the SBA's Standard Operating Procedure 50 10 8.1. Lenders can ask for more than the SBA minimum. It is general information, not a loan approval or legal advice.