Documenting Equity Injection Right Part 1

Inadequate documentation of equity injection is one of the most common issues cited in SBA loan reviews and guaranty purchase requests, often resulting in SBA compliance concerns for lenders.

This is despite the fact that in many cases the injection actually did happen correctly.

Why the problems?

It’s usually about the audit trail, not about whether the Borrower had the money. If you can provide consistent documentation, starting at origination, according to SBA’s injection requirements you’ll protect yourself throughout the life of the loan.

But if your file doesn’t clearly identify the source, transfer, timing, and use of funds, you’re subject to review and citation by SBA for not meeting their SBA Lender requirements for injection. SBA’s equity injection documentation requirements are simple enough. It’s just that there are multiple steps, each needing to be complete and correct, for a solid audit trail.

In this article, Part 1, we’ll look at the first three steps. Our next article, Part 2, will review the fourth and fifth, and conclude with a quick summary.

Here are the first three SBA lender requirements

1. Where did the funds come from – and was it an eligible source?

Acceptable source documentation includes:

• Personal or business bank documents from the Borrower, showing funds were available

• A bill of sale, HUD-1, or closing disclosure showing an asset sale

• A gift letter (if allowable), plus evidence that the donor had the funds to give

• Business tax returns and bank statements for retained earnings

• When permitted and properly structured, Seller note documentation

Don’t only rely only on exhibits in the file.  

2. Were the funds actually contributed?

Acceptable proof includes:

• Cancelled checks

• Wire confirmations

• Settlement statements (HUD-1 or closing disclosures) along with the wire confirmation or cancelled checks

• Escrow account ledgers

• Bank statements from the Borrower showing fund withdrawal.

Do not rely only on spreadsheets or internal worksheets! These don’t provide actual proof of funding.

3. When did the contribution occur?

Equity injections are made either before closing or at closing – and that timing must be documented.

Furthermore, if the injection happens before closing, to avoid SBA follow-up questions, the file must show that:

• The funds were used for eligible project costs

• The borrower wasn’t reimbursed at closing for items shown as injection

• The expenditures relate directly to the Sources & Uses of Funds in the credit memo

Do your current processes include these steps and best practices?

If you’d like some help updating those processes and their checklists, or think your team could use a refresher course on documenting equity injection (or any other SBA 7(a) topic!), give us a call at 877-576-0819, or drop us a note here. 

The start of a New Year is a good time to step back and make sure everyone is on board and ready to make it an excellent year for your Lending team and your Borrowers.

Wishing you a terrific 2026!