SBA Loan Equity Injection for Business Acquisitions: What Counts and What Doesn’t

When you’re buying a business with an SBA loan, the equity injection is often the make-or-break factor. How much do you need? What actually counts? Can seller financing help? What about investor capital?

The SBA’s equity injection rules for acquisitions are more specific — and more restrictive — than most buyers expect. At GoSBA Loans, we help borrowers structure their equity injection to meet SBA requirements the first time. Here’s the definitive guide under SOP 50 10 8.

The 10% Minimum for Complete Changes of Ownership

For any change of ownership resulting in a new owner (a “complete change of ownership”), SBA requires an equity injection of at least 10% of total project costs.

Critical distinction: “Total project costs” means all costs required to complete the change of ownership, regardless of the source of funds. This includes:

• The purchase price
• Working capital included in the loan
• Closing costs
• Any other costs needed to complete the transaction

But it excludes lines of credit and 504 loans from the calculation.

Example

You’re buying a business for $500,000 and need $50,000 in working capital. Total project costs: $550,000. Minimum equity injection: $55,000.

Partner Buyouts: Different Rules

Complete partner buyouts (existing owners buying out another existing owner) have more favorable rules:

• If the 7(a) loan finances 90% or less of the purchase price, no specific equity injection is required beyond standard creditworthiness
• If financing more than 90%, the remaining owner must meet both:
  • 24-month active participation certification (same or increasing ownership for 2+ years)
  • 9:1 debt-to-worth ratio on business balance sheets (most recent fiscal year and current quarter)
• If those conditions aren’t met, equity is required — the lesser of enough to reach 9:1 ratio or 10% of purchase price

Partial Changes of Ownership: Yet Another Framework

For partial changes (where existing owners remain):

• The business must show a 9:1 debt-to-worth ratio or below
• If above 9:1, equity contribution is the lesser of enough to reach 9:1 or 10% of purchase price

What Qualifies as Equity Injection

The SBA accepts seven specific types of equity injection. Each comes with its own documentation and verification requirements.

1. Cash (Not Borrowed)

The simplest form. Cash from personal savings, business balance sheet, or other non-borrowed sources. The lender must verify it prior to disbursement with:

• Copy of check or wire transfer with evidence it was processed
• Most recent 30-day statement from the source account (showing funds were available)
• Statement showing funds deposited into borrower’s account, or a settlement statement

Note: A promissory note, “gift letter,” or financial statement alone is not sufficient evidence without corroborating bank documentation.

2. Cash from a Personal Loan

Borrowed cash can qualify — but only if repayment can be demonstrated from a source other than the cash flow of the business. And specifically, the salary paid to the owner by the business does not qualify as an alternative repayment source.

This means you need outside income (spouse’s salary, rental income, investment income) sufficient to service the personal loan without touching business cash flow.

3. Standby Debt

Debt that is on full standby for the life of the SBA loan qualifies as equity. “Full standby” means:

• No payments of principal or interest for the entire term of the 7(a) loan
• Interest may accrue and be added to the standby balance
• The standby debt is amortized after the 7(a) loan is paid in full
• The standby creditor must subordinate any lien rights to the lender’s collateral
• The standby creditor must take no action against the borrower or collateral without lender’s consent

The lender must use SBA Form 155 or equivalent, with a copy of the note attached.

4. Grants

Grants qualify as equity if they have no repayment or clawback provisions during the life of the 7(a) loan. This includes state and local economic development grants, community development grants, and similar programs.

5. Assets Other Than Cash

Non-cash assets can count toward equity injection. However:

• If the valuation of fixed assets is greater than Net Book Value, an independent third-party appraisal is required
• A valuation of fixed assets provided as part of a business valuation will not meet this requirement — it must be a separate, standalone appraisal

This might include equipment the buyer is contributing to the business, or other tangible assets with verified value.

6. Prepaid Expenses

Prepaid expenses qualify if the lender verifies them by obtaining paid invoices, canceled checks, or bank statements. Copies must be retained in the loan file. This covers things like pre-paid rent, insurance, or deposits the buyer has already funded.

7. Equity Investment (With a Major Caveat)

An equity investment qualifies — but only if it’s not subject to an agreement to repay equity or make distributions to recover an investor’s investment prior to release of the guaranty.

This is where the search fund exclusion comes in.

The Search Fund Exclusion: A Critical Rule for Acquisition Entrepreneurs

The SBA has taken a clear stance on search fund capital:

“Whether called ‘search funding’ or by some other name, SBA will consider any investment subject to an agreement to repay equity or make distributions to recover an investor’s investment prior to release of the guaranty (e.g., certain types of redeemable preferred stock) to be debt and not equity.”

This means:

• Traditional search fund structures where investors expect preferential returns or equity recovery before the SBA guaranty is released are treated as debt
• Redeemable preferred stock with redemption rights during the SBA loan term is debt
• Any investment with a clawback, mandatory redemption, or required distribution prior to SBA guaranty release is debt

If you’re using search fund capital, the investment must be true equity — no guaranteed returns, no mandatory redemptions, no priority distributions during the loan term. Structure it as common equity with no mandatory repayment provisions, or it won’t count.

Seller Debt as Equity: The Half Rule

Seller financing can count toward equity injection, but only under strict conditions:

• The seller debt must be on full standby for the life of the SBA loan
• It cannot exceed half of the SBA-required equity injection

Example

Total project cost: $1,000,000. Required equity injection: $100,000 (10%). Maximum seller standby debt counting as equity: $50,000. The remaining $50,000 must come from other qualifying sources (cash, grants, assets, etc.).

Seller financing that’s not on full standby doesn’t count as equity at all — it’s just additional debt that must be subordinate to the SBA loan.

Verification and Documentation

The lender must verify equity injection prior to disbursing any loan proceeds (except for SBA Express and Export Express loans). Required documentation:

• Cash injection: Check/wire copy, 30-day source account statement, and deposit confirmation
• Borrowed funds: Proposed repayment terms plus standby/subordination terms
• Assets: Independent appraisal if above Net Book Value
• Prepaid expenses: Paid invoices, canceled checks, or bank statements

This documentation must be submitted with every purchase request on a loan that requires equity injection.

ESOP Exception: No Equity Injection Required

Loans to ESOPs for the purpose of purchasing a controlling interest (at least 51%) in the employer small business are not subject to the equity injection requirement. This is a significant advantage for ESOP-based acquisitions.

Same NAICS Code Exception

When an existing business starts or acquires a business that is in the same 6-digit NAICS code with identical ownership and in the same geographic area, and they are Co-Borrowers, SBA considers this a business expansion — not a change of ownership — and does not require a minimum equity injection.

“Same geographic area” means the acquiring entity is within a reasonable distance, allowing management to exercise similar daily control over both locations.

Common Equity Injection Mistakes in Acquisitions

1. Calculating 10% of the loan amount instead of total project costs — it’s total project costs, which may be higher
2. Expecting search fund capital to count as equity — if there’s a repayment agreement, it’s debt
3. Using more than 50% seller standby debt as the equity injection — half is the maximum
4. Providing a gift letter without bank documentation — the SBA requires actual proof of funds movement
5. Getting a business valuation that includes fixed asset values for equity purposes — must be a separate appraisal
6. Waiting until closing to verify — must be verified before any disbursement

The Bottom Line

Equity injection for SBA acquisitions is more nuanced than “put 10% down.” The source matters, the documentation matters, and the structure of investor capital can determine whether your money counts as equity or debt.

Structuring your equity injection for an SBA acquisition? Contact GoSBA Loans — we’ll help you identify qualifying sources and structure your capital stack for SBA approval.