Can I borrow the money for my SBA equity injection?
Short answer
Sometimes. A personal loan counts if repayment comes from a source other than the business's cash flow. Salary from the business does not qualify. Source: SOP 50 10 8.1, Sec. B, Ch. 1, Para. C.2.b; App. 15, Para. C.2.a.
Sometimes. SOP 50 10 8.1, Sec. B, Ch. 1, Para. C.2.b, accepts cash from a personal loan when repayment can be demonstrated to come from a source other than the business's cash flow. The salary the business pays the owner does not qualify.
What the test means
You need a repayment source that does not depend on the business. The SOP does not list approved sources, so the lender judges the proof. Expect it to vary by lender.
Home equity lines
Sec. B, Ch. 6, Para. D.3.f, names a home equity line of creditA credit limit you can draw on, repay and draw on again. (HELOC) as an example of borrowed funds. When equity comes from any form of borrowed funds, the lender must address the proposed repayment terms and any standby or subordination terms.
Business purchases
The personal loan must be to a guarantor, and repayment must come from outside the business. That makes it an unlimited source (App. 15, Para. C.2.a).
Debt the business repays
Debt that the business itself would repay does not qualify under the personal loan language. It counts only if it is on full standby for the term of the 7(a) loan, with no payments of principal or interest. On a business purchase, limited sources can supply no more than half of the required equity injectionThe money or assets you put into the deal yourself. .
504 loans
504 loans use a different rule. The required contribution may be borrowed if it is subordinate to the third party loan and the 504 debenture (Sec. C, Ch. 1, Para. E; 13 CFR § 120.912).
Confirm with your lender before you open a new loan for this purpose.
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