How much equity do I need to buy a business with an SBA loan?
Short answer
On an Initial Acquisition, the requirement is 10%, which cannot be reduced or eliminated, measured against total project cost. Source: SOP 50 10 8.1, App. 15, Para. C.2.a.
On an Initial Acquisition, the requirement is 10%, which cannot be reduced or eliminated. SOP 50 10 8.1, App. 15, Para. C.2.a, measures it against total project cost. That means all costs required to become operational, regardless of the source of funds, except lines of creditA credit limit you can draw on, repay and draw on again. and 504 loans.
What an Initial Acquisition is
It is the default category. It produces a new majority or largest individual owner who was not previously an owner. It also covers a buyer employed by the business for fewer than 24 months (App. 15, Para. A.1.a).
How the sources work
On $1,000,000 of total project cost, the minimum is $100,000. Limited sources can supply no more than half of the required equity injectionThe money or assets you put into the deal yourself. , or $50,000 here. Those are standby debt, seller debt on full standby and non-controlling minority equity. The rest must come from unlimited sources, such as cash, gifts, qualifying personal loans, grants and eligible prepaid expenses.
Real estate in the deal
Real estate bought with the business carries the same equity requirement. With two loans, the lender allocates equity pro rata. If a 504 loan finances the real estate, the 504 rules apply to it.
If the price is above the valuation
The business valuation must support the purchase price. If the amount paid exceeds the valuation, the difference must be made up by equity (App. 15, Para. C.1.a). Additional limited sources may be used for that gap, on full standby (Para. C.2.a).
Smaller loans
The requirement also applies on 7(a) Small and SBA Express loans used to buy a business (Sec. B, Ch. 2, Para. A.2).
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