Can a seller note count toward the SBA equity injection?
Short answer
Yes, if it is on full standby for the term of the 7(a) loan, with no payments of principal or interest. Seller debt and other limited sources can supply no more than half of the required equity injection. Source: SOP 50 10 8.1, App. 15, Para. C.2.a.
Yes, if it meets two tests. SOP 50 10 8.1, App. 15, Para. C.2.a, requires seller debt to be subordinated to the lender. It must also be on full standby for the term of the 7(a) loan, with no payments of principal or interest. The same paragraph limits how much of the equity can come this way.
The cap
Seller debt, standby debt and non-controlling minority equity, alone or together, can supply no more than half of the required equity injectionThe money or assets you put into the deal yourself. .
For example, with $1,000,000 of total project cost on an Initial Acquisition, the minimum is $100,000. A full standby seller note could provide up to $50,000. The other $50,000 must come from an unlimited source, such as cash, gifts or a qualifying personal loan.
When the price runs above the valuation
Additional limited sources may be used when the sales price exceeds the value supported by the Business Valuation and Quality of Earnings report. Those added funds must be on full standby (Para. C.2.a).
What the note needs on paper
The lender must use SBA Form 155 or its own equivalent, with a copy of the note attached. The seller subordinates lien rights and takes no action against the borrower or collateralProperty a lender can take and sell if a loan is not repaid. without the lender's consent.
Notes that are not on full standby
A seller note with payments can still be part of the deal, but it does not count as equity. It is counted as debt against the valuation and coverage tests (App. 15, Para. A).
Other 7(a) loans
Standby debt can also count as equity on other 7(a) loans, and those sections state no half limit (Sec. B, Ch. 1, Para. C.2.b).
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