SBA loans fund a variety of business needs including business acquisition or owner occupied real estate, fixed-asset purchases such as computers, equipment, vehicles and machinery, business expansion and permanent working capital, start-up business expenses and refinance of existing debt.
Each year, new Standard Operation Procedures (SOPs) are introduced as it relates to SBA lending programs and the lenders who participate. Here, we have broken down SOP 50 10 5J, covering new mandates for SBA 7a and 504 loans.
Regardless of the loan type, the lender must determine if the equity position, any required equity injection and the proforma debt-to-worth are acceptable based on factors related to the type of business, experience of management and the level of competition in the area.
A business in operation up to one year is considered a start-up. New equity requirements for start-up businesses include injection of at least 10% of the total project costs (all costs are required to become operational, regardless of the source of funds).
If a change of ownership results in a new owner:
If a change of ownership is the result of a partner buyout, then:
Sources of equity injection include cash that is not borrowed, cash that is borrowed through a personal loan to the business owner, project related assets other than cash and standby debt (debt that is on standby allowing no payment of principal or interest for the term of the SBA loan may be considered equity). Any cash that is borrowed through a personal loan to the business owner must demonstrate repayment coming from a source other than the cash flow of business. Salary paid to the owner by the subject business does not qualify. In addition, lenders are required to substantiate the value of project related assets other than cash with an independent third-party valuation.
Sources of equity injection that are not allowed include value or cost of education and funds that are borrowed that do not meet the criteria mentioned above.
Documenting an injection will be required. When doing so, be sure that:
Your lender should be in contact if any of these updates apply to you or if they affect your loan in any way.