Equity injection has always been an integral part of SBA Lending.
And it’s always been an area where errors can impact the Lender’s guaranty.
SBA has historically looked at injection in three ways:
1) Is it required at all?
2) What’s required to evidence injection?
3) What’s required to source injection?
With the new SOP 50 10 7.1 taking effect on November 15th, 2023, SBA now only requires equity injection on Change of Ownership transactions, and has defined it as new cash or acceptable assets added to the project and not already reflected on the Borrower’s balance sheet prior to the injection.
For all other transactions, SBA says that the Lender’s equity injection requirements must be consistent with what the Lender does for similarly-sized non-SBA loans.
Here are SBA’s Change of Ownership requirements.
Complete Change of Ownership:
SBA requires an injection of at least 10% of the total project costs. Note that this is not the total purchase price.
Seller debt may only be considered part of the injection when the debt is on Full Standby.
If the debt is on Partial Standby, Borrower’s historic cash flow must support their ability to make payments, and at least ¼ of the injection must be from a source other than the Seller.
Complete Partner Buyout, when the loan will finance 90% or more of the purchase price:
The remaining partner must certify they have actively participated in business operations and held the same or increased ownership interest for at least the past 24 months, and
The Balance Sheet for the most recent completed fiscal year and current quarter must reflect a debt-to-worth of no greater than 9:1 prior to the change of ownership
If the Lender cannot document both of these requirements, the remaining partner must contribute either (whichever is less):
Sufficient funds to reflect a debt-to-worth of not greater than 9:1 on the profroma balance sheet, or
Ten percent of the purchase price of the business.
Partial Change of Ownership:
The Balance Sheet for the most recently-completed fiscal year and current quarter must reflect a debt-to-worth of no greater than 9:1 prior to the change of ownership.
If the Lender cannot document this, the remaining partner must contribute either sufficient funds to reflect a debt-to-worth of not greater than 9:1 on the proforma balance sheet or 10% of the purchase price of the business, whichever is less.
Sourcing of injection is no longer an SBA requirement. However, if the Lender requires sourcing of injection for similarly-sized non-SBA loans, then it must continue to do so for its SBA loans.
When required by either the Lender and/or SBA, evidence of injection must, as part of the closing documentation, document the injection in accordance with the same processes used for Lender’s similarly-sized non-SBA loans.
These changes in the SOP don’t necessarily make injection easier! With more reliance on the Lender to “Do What You Do,” it’s essential that your policies and procedures are perfectly clear on what that actually is.
We’re here to help. As your favorite SBA Lending geeks – or, if you prefer, experts! – we can review your policies and procedures, assist with loan reviews, and bring your team up to speed on the new SOPs – whatever you need to have the best possible SBA Lending department. Give us a call at 877.576.0819, or drop us a note through our website here. We look forward to talking with you!