20% Rule

searcher profile

August 29, 2025

by a searcher from University of California, Los Angeles - UCLA Anderson School of Management in Santa Monica, CA, USA

Different sources appear to indicate different answers. If a third party provides equity that is less than 20% of the deal are they exempt from a personal gauruntee on an SBA 7 loan? Also is it 20% cumulatively or for each individual? Thank you for all those who reply.
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Reply by a lender
from California State University, Sacramento in Seattle, WA, USA
The PG requirement for a 100% acquisition is that each individual with 20% + ownership has to Fully PG. Live Oak Bank interprets the economic benefit as well as ^redacted‌ mentions above to guage whether a 20% + ownership threshold could be reached during the 10 year life of the SBA loan. If you’re doing a partial buy-in the seller retains any %ownership post close and has to PG for 2 years(liens on personal assets) not required. And with a partial buy-in, all new owners including equity investors would be required to be co-borrowers and all 20% + owners need to PG. (one exception… If you have a 10% owner that’s staying on with a partial buy-in and keeping same ownership % that’s less than 20% they would not be required to PG. ) Join our weekly office hours where we go over all things SBA in a 1 hour live zoom. redacted to register.
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Reply by an investor
from McGill University in San Diego, CA, USA
I think the bankers and lawyers on Searchfunder will have a more informed view, but my understanding (which might be wrong) is that the 20% test is applied per individual owner. And ,if the investor ends up owning <20% of the company post-close, the SBA doesn’t require that person to sign a personal guarantee. (Though a lender may still ask for one.) So, a 15% cash contribution that buys 15% ownership would not be subject to the PG. But a 15% investment that gets a 50% step-up in actual equity units (i.e., converts into 22.5% ownership), will cross the 20% threshold and require a personal guaranty.
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