What Is an SBA Loan Equity Injection? And What Are Your Options?

Updated on September 9, 2020
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What Is an SBA Loan Equity Injection?

An SBA loan equity injection is a down payment that certain applicants must provide to qualify for an SBA 7(a) loan or SBA 504 loan. Startups, applicants acquiring a business, and all 504 loan applicants must provide an equity injection, typically 10% of the loan amount.

When you apply for a small business loan, the lender’s main concern is whether you’ll be able to pay back the loan on time. Having some “skin in the game” can help convince the lender that you’re committed to your business and can comfortably afford the loan payments. Basically, bringing some of your own resources to the table as a down payment  indicates that you are confident in your business’s future.

Among small business loans, SBA loans in particular come with a host of rules, one of which is the requirement for an equity injection, or SBA loan down payment. The amount required is typically 10%, though it can be higher in some instances. The requirement applies to all SBA 504 loans and to some applicants for SBA 7(a) loans.

Saving up 10% (or more) of your total loan amount can be tough, so the earlier you find out everything you can about the SBA loan equity injection, the better off you’ll be during the application process. Learn how the SBA loan equity injection works, as well as some alternative loan options if you can’t come up with a down payment.

SBA Loan Equity Injection: How It Works

If you’ve ever purchased a home, you probably had to make a down payment on the purchase price. The SBA loan equity injection requirement works in much the same way. The bank or lender won’t fund your project in full. They will require you to bring some of your own resources to the table to show that you are committed to the future of the business.

When an Equity Injection Is Required

The following types of SBA loans require an equity injection:

  • SBA 7(a) loans if the applicant is a startup or if the ownership of the business is changing hands (for example, with a business acquisition or partner buyout).
  • All SBA 504 loans

The SBA does not require an equity injection for the following types of loans:

  • SBA 7(a) loans if the applicant isn’t a startup or if the business’s ownership structure isn’t changing
  • SBA Express Loans
  • Export Express
  • CAPLines
  • SBA Microloans
  • SBA Veterans Advantage

Note that even in those cases where the SBA doesn’t require an equity injection, the bank or lender has the discretion to require one.

How Much of a Down Payment Is Required?

The standard equity injection required for SBA loans is 10%. For example, if you request $100,000 in financing, then you have to bring $10,000 of your own funds to the table as a down payment.

Compared to conventional bank loans, which typically come with a 20% to 40% down payment, this is low. The lender has the discretion to require a down payment higher than 10%, but most stick to the SBA standard.

SBA 504 loans have higher mandated down payments in some specific cases. Owners of startups, defined as businesses under two years old, must put up a 15% down payment.[1] And owners of special use properties, such as hospitals and golf courses, must also make a 15% equity injection. If both situations apply to you—you’re the owner of a startup that is considered a special use property—then you have to make a 20% equity injection.

As a borrower, you’ll be glad to know that there’s flexibility in how you pay the down payment. The money doesn’t necessarily have to be in the form of cash—it can come from other sources, as we’ll explain in detail next.

Eligible Sources of Money for an SBA Loan Equity Injection

Your SBA loan equity injection doesn’t have to be a cash down payment. The SBA’s mission is to make it as easy as possible for small businesses to get financing. So, they offer some flexibility on where the money for a down payment can originate.

All of the following sources of funds are eligible to use for an equity injection:

  • Cash from a business bank account
  • Funds from a personal loan that you’re going to repay from an income stream that is independent of the business (e.g. inheritance income or income from a side gig)
  • Appraised business assets, including property that you’ve owned for at least two years
  • Money that you withdraw or rollover from a 401(k) or other retirement account
  • Other debt, such as a seller’s note, as long as it is on standby throughout the term of the SBA loan

Standby Debt

The last item in this list requires special note. It’s possible to use other loans as the down payment for your SBA loan. This might sound counterintuitive. After all, isn’t the point of the equity injection to ensure that you have invested some of your own money in the company? Yes, but since you have to pay back the other debt at some point, that counts as “your money.”

During business acquisitions, sellers often offer a small loan to the buyer to cover a portion of the purchase price. This loan must be on full standby in order for you to be able to use it for your equity injection. That means the seller must agree that you won’t start paying them back until you’ve fully paid back the SBA loan. This is the SBA’s way of ensuring that your business’s cash flow gets funneled to repaying the SBA loan first.

The standby requirement can make things more difficult for people who are on the market to buy a business. Sellers might not agree to be paid years down the line, after you’ve repaid the SBA loan. However, you can get around this by having one seller’s note on standby for the amount of the equity injection. And then you can have a second seller’s note for additional financing, where you start paying back the seller right away.

Combining Sources of Equity

Many borrowers mix different sources of equity to come up with the full down payment, according to Jim Conroy, a Senior Vice President and Regional Manager at New York Business Development Center (NYBDC):

Ability to satisfy the SBA equity contribution is more complex than needing to have cash in an account. The equity could also be property that was owned for more than two years before the loan application, loans from friends or family, or could involve seller financing. Most borrowers will use a combination of these equity sources for SBA and other loans that require owner equity.

So don’t sweat it if you can’t come up with all the cash or assets you need. You can use a combination of equity sources for your SBA loan equity injection.

Where the Money Can’t Come From

The SBA offers a good deal of flexibility in terms of the source of your equity injection. This is good news for entrepreneurs launching a business, when money can be tight and you have to closely watch your budget. That said, the SBA does have some restrictions.

You cannot use any of the following for your SBA loan equity injection:

  • Assets that haven’t been appraised
  • Any other loan that isn’t on full standby
  • Any other loan that is being serviced by the cash flow of the business
  • Value or cost of education
  • Salary that the owner takes from the business
  • Personal stocks or investments (unless you cash them out first)

Whatever the source of your equity injection, the lender will ask you to verify and document it. For example, if you use cash as your equity injection, you’ll need to provide business bank account statements as proof of the availability of those funds. And if you spend the funds that you’re using as your down payment before the loan closes, you’ll need to submit an invoice showing how you spent those funds. Your lender will provide additional details on how to verify your equity injection.

Can’t Afford the SBA Loan Equity Injection? Try These Zero-Down Business Loans

Some small business owners can’t afford to put up a substantial down payment. Especially if you’re just launching your business, finding the resources for a down payment can be difficult. Even with a more established company, you might not have extra money to spare.

If you’re in this position, you can opt for other types of loans that provide 100% financing for your project. The terms on these loans aren’t as favorable as you’d get on SBA loans, but you don’t have to worry about a down payment.

The following types of zero-down loans can be good options for small business owners:

  • Some Types of SBA Loans

    The SBA has a variety of loan programs, many of which don’t require an equity injection from the business owner. SBA 7(a) loans require a down payment only for startups and changes in ownership. If you have an existing business and simply need working capital, there’s no need to provide a down payment.

    SBA Microloans are another no-money-down option. These are ideal for startups and business owners who need a smaller amount of money (under $50,000). These loans come from nonprofit lenders, which generally have easier requirements than banks.

    Another good option is the SBA Express loan. The SBA Express is a loan under $350,000 that goes through expedited processing. You can receive SBA approval within 36 hours, and the paperwork requirements are lighter for the SBA Express compared to the regular 7(a) or 504 loan.

  • Online Loans

    Alternative lenders are another good option for business owners who want to avoid a down payment. These are generally short-term loans or medium-term loans from non-bank lenders who operate online.

    Online lenders generally don’t require an equity injection, but they’ll only extend you a loan that they think you can afford to pay back based on your business’s cash flow. That means you might need a $100,000 loan but end up with less.

    The other downside is that loans from alternative lenders can be much costlier than SBA loans. The interest rates and fees can be several magnitudes higher than SBA loan rates. Make sure you factor that in when deciding which financing option is right for your business.

  • Equipment Financing

    Many people who apply for an SBA loan are on the market for buying new or used equipment. In lieu of an SBA loan, an equipment loan can be a great fit and much easier to qualify for. There are a host of equipment lenders and leasing companies, some of which focus just on particular industries, like medical equipment or hospitality equipment.

    Many equipment financing companies provide 100% financing, though some will require a down payment based on the borrower’s creditworthiness and the value of the equipment.

  • Line of Credit

    A line of credit is another versatile financing option with no equity injection necessary. With a line of credit, you get access to a fixed amount of money but don’t need to use all of it at once. You draw on the funds as needed and only pay interest on the money that you use. Once you pay back the money that you’ve drawn, your available credit goes back up.

    A variety of lenders, ranging from banks to online lenders, offer business lines of credit. None of them will charge a down payment, but they’ll only grant you a credit limit that makes sense given your business’s revenues.

  • Invoice Financing

    Many business owners apply for an SBA loan seeking working capital. If you need working capital and are a B2B business, consider invoice financing as a zero-down alternative. Invoice financing allows you to trade in unpaid, pending invoices for capital. This is a temporary cash flow solution that lets you cover business expenses while you wait for your customers to pay you.

    Invoice financing doesn’t require an equity injection because you’re limited to receiving the amount of capital that’s reflected in your invoices. Just be cautious if you’re utilizing invoice financing because it’s costlier than an SBA loan.

For additional options, read our guide to no-money-down business loans.

See Your Business Loan Options

The SBA Loan Equity Injection Shows You’re Committed to Your Business

At the end of the day, the SBA loan equity injection signals to the lender that you’re committed in your business and are willing to “put your own skin in the game.”

Keep the following in mind when applying for an SBA loan:

  • SBA 7(a) loans require an equity injection only if the borrower is a startup or if the business’s ownership structure is changing (as with a business acquisition, for instance).
  • All SBA 504 loans require an equity injection.
  • The usual equity injection is 10%, though lenders might set it higher. SBA 504 loans also have a higher requirement in some cases.
  • The money for your equity injection can come from cash, retirement savings, appraised assets, a personal loan, or even another business loan in full standby.

Fortunately, the SBA leaves some wiggle room for how you come up with the down payment. Use that to your advantage, and try not to let this requirement stop you from getting an SBA loan. These loans have very favorable terms that can help your business grow over the long term.

Article Sources

  1. CPCDC.com. “SBA 504 Loan Program
Priyanka Prakash, JD
Senior Contributing Writer at Fundera

Priyanka Prakash, JD

Priyanka Prakash is a senior contributing writer at Fundera.

Priyanka specializes in small business finance, credit, law, and insurance, helping businesses owners navigate complicated concepts and decisions. Since earning her law degree from the University of Washington, Priyanka has spent half a decade writing on small business financial and legal concerns. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.

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