If SBA equity is waived, can the loan include working capital?
Short answer
Not dedicated permanent working capital. A lender that eliminates equity on a Business Expansion or Owner Buyout cannot include it in a 7(a) term loan within 90 days. Source: SOP 50 10 8.1, App. 15, Para. C.2.a.
Not dedicated permanent working capitalMoney for day-to-day costs such as payroll, rent and inventory. Full definition. SOP 50 10 8.1, Appendix 15, Para. C.2.a, ties that limit to a waiver of the equity injectionThe money or assets you put into the deal yourself. .
When a waiver is possible
The lender may reduce or eliminate equity only on a Business Expansion or Owner Buyout. An Initial Acquisition cannot use this. Its minimum is 10%, which cannot be reduced or eliminated.
- The lender must determine the borrower has sufficient liquidity and working capital to sustain operations after the deal.
- The applicant's balance sheet must not show a negative net worth as of the last fiscal year-end.
What a waiver costs you
Eliminating equity also bars dedicated permanent working capital in this or any other 7(a) term loan request within 90 days. SBA's reasoning is that a waiver assumes the business is adequately capitalized. Any working capital the deal needs must come from existing cash or a line of creditA credit limit you can draw on, repay and draw on again. .
One small exception covers incidental post-approval adjustments. Excess proceeds remitted to the borrower cannot exceed $10,000 or one half of one percent of the loan amount, whichever is greater.
Without a waiver
A change of ownership loan may include working capital and borrower out-of-pocket expenses (Para. A.3.b). If 50% or more of proceeds go to working capital, the lender must explain why in its credit memorandum (Para. C.2.b).
Whether to waive is the lender's decision. Lender policies vary.
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