Everything You Need to Know About SBA Loan Equity Injection

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EVERYTHING YOU NEED TO KNOW ABOUT SBA LOAN
EQUITY INJECTION
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What is SBA LOAN EQUITY INJECTION
Small Business Administration (SBA) loan equity
injection is front money, typically 10 of the
loan amount, provide by the borrowers in order to
secure SBA 7(a) loans or SBA 504 loans. The SBAs
Standard Operating Procedure document, referred
to as SOP 50 10 5(J), outlines guidance for
lenders to determine the suitable equity
injection. While applying for business loans or
securing investments, lenders and investors
require borrower to commit a worthwhile amount of
money to an acquirement as skin in the game to
persuade lenders to lend you money, since you can
easily afford the loan payments and is committed
to your business. Bringing more skin in the game
signifies that youre confident in your business
future and ready to face the failure, in case you
default. This equity injection applies to both
SBA loans and traditional loans.
The equity injection amount is typically 10, and
15 for loans involving special or limited use
properties. Putting money up front for can be
tough, so prior understanding about SBA loan
equity injection will help you getting prepare
for the loan application. Here is everything you
need to know about SBA loan equity injection
along with some other business loan option in
case you dont qualify for SBA loans.
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How SBA Loan Equity Injection Works?
While purchasing a home, you probably had to make
a down payment. The requirements for SBA loan
equity injection are the same. While applying for
SBA loans, the bank or lender wont fund you full
amount. They want you to bring in your own
resources as down payment to demonstrate you can
afford and are committed.
SBA Loan Equity Injection Requirements
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FOR PARTNER BUYOUT An amount of at least 10 is
required of the total assets after the change of
ownership. Alternatively, the remaining owner(s)
must provide an additional equity injection of at
least a 10 of the net worth with maximum pro
forma debt-to-worth ratio of 91. This option is
interesting in cases where the business has
adequate equity to secure funds to pay out a
minority partner. In such cases, the SBA can lend
up to 100 of the total amount.
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FOR STARTUPS An amount of at least 10 is
required of the total project cost
FOR COMPLETE ACQUISITIONS An amount of at least
10 is required of the total project cost for
change of ownership (15 for loans involving
special or limited use properties).
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Equity Injection Down Payment Sources
There is a takeaway the SBA loan equity
injection doesnt necessarily have to be a cash
down paymentit can come from other sources as
well, including
A 10 standard equity injection is required for
SBA loans that is low in comparison with
traditional loans, which usually take up a 20 to
40 down payment. This percentage is the SBA
standard but it can vary based on the lender
discretion. In certain cases, SBA 504 loans have
higher administered down payments. Startups under
two years of time in business and special use
properties (hospitals and golf courses) are
required to provide 15 of equity injection. If
youre a startup business with special use of
properties, youre require to provide a 20 down
payment.

• Funds from a business bank account
• A personal loan that is not related to business
• Valued business assets youve owned for at least
  two years
• Cash from 401(k) or other retirement accounts
• Sellers note considering its a substitute all
  over the SBA loan term

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Combining Sources of Equity
There is also a flexibility of combining sources
for equity injection. The aptitude to fulfill the
SBA equity contribution is more compound than
needing to have cash. The equity injection can be
anything from an owned property to loans from
loved ones, or seller financing. Using a
combination of these equity injection sources can
help you qualify for SBA and other types of loans
that require owner equity.
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What Source Doesnt Qualify for Equity Injection?
In order to bring in your own resources on table
for the SBA loan equity injection, SBA offers
flexibility regarding equity injection sources.
This is a great deal especially for startups,
when cash is tight and you have to follow the
budget. Having said that, there are some
restrictions dictated by the SBA. There are
certain sources that dont qualify for your SBA
loan equity injection, including
Unvalued assets
Loans that are not on full standby
Loan that is used for business cash flow
Value or cost of education
Owners salary
Personal stocks or investments
For every SBA loan, the lender will require you
to validate and document your equity injection.
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Business Loans Alternatives to SBA Loan Equity
Injection
For many businesses, providing a sizeable amount
of down payment is difficult, especially when
youre just launching your business. Having extra
money to spare is even difficult for more
established businesses. There are some plenty of
business loan alternatives to choose from when
you cant afford equity injection. However, the
terms on such alternatives will not be as
flexible and attractive as youd get on SBA
loans, but theres no down payment requirement,
of course.
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Line of Credit
SBA Loan Types
Alternative Lending
Equipment Financing
Invoice Financing
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SBA LOAN
TYPES
Among many SBA loan programs for businesses, some
dont require an equity injection. In case of SBA
7(a) loans, an equity injection is require only
for startups and changes in ownership. But, if
youre an established business in need of quick
working capital, theres no requirement of a down
payment.
Many nonprofit lenders provide SBA Microloans
that also dont require a down payment. With
easier requirements than banks, microloans are
prefect-funding option especially for startups
and businesses that require smaller loan amount
of 50,000 or less. SBA Express loan is another
option with cash under 350,000 that close
significantly faster (within 36 hours) than other
types of SBA financing with easier paperwork
requirements.
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Alternative Lending
Alternative lending is another no-down payment
option for small business owners. These online
loans are generally short-term loans or
medium-term loans from non-bank lenders. There is
no equity injection requirement, but the loan
extension is based on businesss cash flow.
Online loans are costly as compared to SBA loans
in terms of high interest rates and fees. So,
ensure you review and compare the options before
choosing an online lender.
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Equipment Financing
Most borrowers that require SBA financing are
looking to buy new or used equipment. Rather an
SBA loan, an equipment financing is a better
option with quick and easy qualification. You
will find a magnitude to equipment financing and
leasing companies, which provide funding to
different types of industries.
Most equipment financing companies offer 100
financing, however some might ask for a down
payment based on the borrowers creditworthiness
and equipment value.
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CREDIT
Line of
A line of credit is a flexible financing option
with no down payment requirement. A credit line
allows you a fixed loan amount that you can
withdraw as and when needed. The best thing about
a line of credit is that you only pay interest on
the used funds. Once you repay the drawn amount
from your credit line, that amount is again
available for you to borrow.
Many online lenders and banks provide line of
credit without any need of a down payment.
However, a credit limit is granted based on your
businesss revenues.
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Invoice Financing
Invoice financing is another versatile financing
option for B2B businesses in need of working
capital. With invoice financing, you sell your
invoices at a discount to a factoring company in
exchange for working capital. Its a provisional
cash flow solution, which allows you to pay for
business expenses till you get paid from your
customers.
While choosing invoice financing, be cautious
since its more costly than an SBA loan.
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THE BOTTOM LINE...
TBM
Eventually, the SBA loan equity injection
demonstrate your commitment and willingness to
bring in your own resources to the table as a
down payment. Luckily, the SBA also offers
flexibility for how you bring forth the down
payment essential for SBA loans qualification.
SBA loans have the most favorable terms and
benefits that can help your business grows, so
use that flexibility to your advantage.
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