Minimum equity requirements for SBA Loans

November 03, 2020

by a searcher from University of Pennsylvania - The Wharton School in New York, NY, USA

I'm trying to understand how the SBA calculates the total project cost and therefore the minimum 10-20% equity check.

Key question is if I'm buying a business cash-free/debt-free, presumably I would want to fund the balance sheet with some cash at closing. Would that "extra" cash be considered part of the project cost? Would it count as equity for the SBA?

Example: Buying a business for $90 to seller + $10 of working capital & closing costs = $100 project cost. Normally, that would require $10 of equity and $90 of SBA debt. However, let's say I want to fund $10 of cash also onto the balance sheet. Option 1 is that the project cost is now $110, and I need $11 of equity and $99 of SBA debt. Option 2 is that the SBA requires the $10/$90 split for the original project cost, and then $10 of extra cash is just separate (i.e. all equity). The difference between the two options is funding either $11 of equity or $20 of equity, so pretty material.

Anyone know how the SBA would look at either of these two options?

Reply by a lender
from University of Missouri in St. Louis, MO, USA

You can buy a business with 10% down on the project cost if the cash flow is strong enough. On the other question, funding the WC with an SBA 7A loan is incredibly expensive. You will pay P&I over 10 years and pay a full guarantee fee if you fund your WC need this way. Depending on the size of the WC need you would be much better served minimizing the SBA loan to the bare minimum and funding WC with a revolving line. This does a few things: 1) minimizes the need to amount used as you only pay interest on what you borrow v. paying full P&I day one 2) this obviously helps the cash flow as well and allows you time to normalize the cash conversion 3) pegs the A/R and inventory to the line. This is important to help you function post close as the line can be increased as you grow the business. If you don't have a line at close the SBA loan is in first position on all assets so getting a line later is incredibly difficult.

Reply by a lender
from Sam Houston State University in 5324 Community Dr, Houston, TX 77005, USA

Kaustubh, this is a great questions. We look at the total project including all closing costs and working capital to calculate the percentage of the project. Typically we require 15% equity between borrower and seller on full stand by, but the total project calculation would include the closing costs and working capital. For example, a $1MM purchase with $50M in closing costs and $50M in working capital would be a $1.1MM project. We would require $165M in equity and a SBA loan of $935M.

+13 more replies.

Join the discussion