What Is an Equity Injection?
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An equity injection is a lump sum of money invested into a business at any stage. In some cases, such as the purchase of commercial property or when applying for an SBA loan, an equity injection refers to a down payment made by the borrower in order to qualify for the loan. In other cases, an equity injection may refer to an owner selling shares of their company in exchange for capital.
When used as a down payment, an equity injection is usually calculated as a percentage of the total loan amount and demonstrates to a lender that the owner is motivated to repay the loan. If an equity injection comes from an outside investor, the owner may be using it as a way to avoid taking out a small-business loan.
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SBA equity injection
An SBA equity injection, also known as an SBA loan down payment, is required when applying for several different types of SBA loans, including SBA 7(a) loans and SBA 504 loans — however, not under every circumstance. For example, 7(a) loans require an equity injection when purchasing a business, whereas 504 loans require an equity injection for the purchase or renovation of commercial property or the purchase of heavy equipment.
How does an equity injection work?
When used as a loan down payment, an equity injection requires a lump sum of cash from the borrower. The amount may be a predetermined percentage, as is the case with the SBA, or it may depend on your lender and what your loan is for. In any case, it should be something that is discussed upfront with your loan officer, so you know exactly what to expect.
If you are looking for new investors to raise capital through equity financing, you should make sure you have financial reports and a plan for how much capital you need and how you will use it. These will all be necessary to present to any potential investors. If you don’t have a network of investors already, you may consider looking via LinkedIn or by attending local industry events.
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How much is an equity injection?
When used as a down payment, your equity injection amount is ultimately determined by your lender and your use of funds. The average down payment for the purchase of commercial real estate, for example, ranges between 10% and 30%, whereas for SBA loans, down payment amounts range from 10% to 20%, depending on the program and what the loan is for.
It’s important to note that for most uses, down payments are calculated on the total cost of the purchase or project, not the amount of the loan you’re requesting. That means that even if you are only requesting a loan of $50,000 for a $500,000 project, your down payment may still be calculated as a percentage of the $500,000, not the $50,000.
When do I need an equity injection?
When bringing on investors, an equity injection can help you fund your business without having to take on debt, which is a route that many business owners opt to take, especially if they believe their company is going to scale up in value. The tradeoff is your investors will have partial ownership of your company in return.
For equity injections as a down payment, it may be prudent to provide one even if it isn’t required by your lender but you’re capable of doing so. Coming to the table with cash can demonstrate to a lender that you’re serious about your loan and may give you higher approval chances and better terms.
Sources for an equity injection
Personal savings. If you have money put away, that may be the first source of funding for an equity injection or down payment. You could also consider your retirement savings, also known as a Rollovers as Business Startups (ROBS) transaction; however, this would put your retirement savings at risk and should be discussed first with a financial advisor.
Investors or business partners. If you have a trustworthy partner or an investor willing to put money into your business, this can be a viable source of funds for an equity injection. Investors may expect shares or ownership in return and are usually required by lenders to have good personal finances.
Sale of business or personal assets. Selling real estate or other valuable property can be a good way to get a lump sum of cash.
Business assets. Depending on the lender, you may be able to use business assets or equipment as equity without liquidating them, meaning you don’t have to sell them for cash. You need to own the assets outright and will likely need to have an appraisal done if you haven’t had one recently.
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