Can an outside investor's money count as SBA equity?
Short answer
Yes, if it is true equity with no agreement to repay or recover the investment before the SBA guaranty is released. On a business purchase, a non-controlling minority investment is a limited source. Source: SOP 50 10 8.1, App. 15, Para. C.2.a.
Yes, if it is true equity. SOP 50 10 8.1, Sec. B, Ch. 1, Para. C.2.b, accepts an equity investment with no agreement to repay it or make distributions recovering it before the guaranty is released. An investment with such an agreement is debt to SBA, as with certain redeemable preferred stock.
Business purchases
App. 15, Para. C.2.a, treats a Non-controlling Minority Equity Investment as a limited source. Limited sources can supply no more than half of the required equity injectionThe money or assets you put into the deal yourself. . To qualify, the investor must hold less than 20% and exert no control over the operating business.
Distribution limits
When equity investments are used to meet the requirement, distributions are prohibited until the 7(a) loan is paid off. The exception is distributions made solely to cover the investor's tax on business income. Additional investment beyond the required equity may receive standard distributions, subject to lender agreements.
What the lender must review
The lender must document all equity investment terms in its credit memorandum, including provisions that take effect on a sale of the business.
Other consequences for the investor
- Guaranty. At 20% or more, an owner must give an unlimited full guaranty (Sec. A, Ch. 5, Para. A.1).
- Citizenship. Every direct and indirect owner must be a U.S. citizen or national with a U.S. principal residence (Sec. A, Ch. 1, Para. F).
- Standby debt. A provider of standby debt may not also take equity in the business (App. 15, Para. C.2.a).
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