Documenting Equity Injection: 5 Tips To Get It Right

SBA is clear: if you don’t document equity injection according to their requirements, you risk repair and potentially even denial of your SBA guaranty.  

For Lenders, the key to staying in compliance often comes down to having strong processes, practical guidance and the right support in place.  That’s where lender consulting services and structured SBA lender training can make all the difference.

To keep your processes strong and avoid costly errors, let’s walk through five key steps for documenting equity injection and staying in line with SBA requirements.

1. Source of funds

You, the Lender, must obtain a copy of the most-recent statement(s) from the account where funds are being withdrawn. These statements should cover at least 30 days prior to the withdrawal to prove that the funds were available.

2. Gift letter

If the injected funds are a gift, the Borrower must provide a Gift Letter, as well as statements (as described above) from the giftor’s account. You’ll also need a copy of the Borrower’s bank statement to verify that the gifted funds were in fact deposited to the Borrower’s account. Note that the Gift Letter is insufficient by itself!

3. Wire confirmation or a cancelled check

Either a copy of the cancelled check or a wire confirmation, plus a copy of the source-of-funds bank statement showing that the funds were withdrawn, verifies that the funds were in fact injected.

4. Certified closing statement

In situations where the funds are deposited to an escrow account, the certified closing statement verifies that the funds were received. You’ll also want to watch for funds back to the Borrower at closing. If funds were returned to the Borrower, that amount must be deducted from the total amount injected.

5. Borrowed Funds

If the equity injection comes from any form of borrowed funds, such as a HELOC or other financing, the Lender must address the proposed repayment terms and any standby or subordination terms. In addition, a copy of the most-recent loan statement must be obtained to confirm the availability of funds for the injection.

One final note: SBA allows some exceptions for SBA Express and Export Express loans. However, in our opinion – and as SBA also states in SOP 50 10 8 – Lenders should always follow their regular practices for verification of equity injection. In other words, don’t mess with success; your best practices should apply across all loans in your portfolio.

As SBA consultants, we’ve seen some unhappy situations when the Lender fails to provide source and evidence of equity injection to SBA when requesting guarantee purchase. To keep your guarantee intact, develop standard procedures (a checklist is great!), and keep your team up to date on the process.  Leveraging lender consulting services can help you build consistent procedures and avoid costly mistakes, while SBA lender training ensures your staff know exactly what SBA expects.

If you’d like some help on creating or updating your process (and checklist!), or if some refresher SBA lender training would help your team stay current, drop us a line or give us a call at 877-576-0819. We’re always ready to talk about how your SBA team can excel!