SBA 7(a)

SBA Loans - Can you borrow the down payment money needed for an SBA loan?

For the most part the answer is no and the reason is simple. The SBA wants “skin in the game”. This “skin” is equity that you must invest in the business and this equity usually can’t come from a loan.

Here are some exceptions to this guideline:

Get a loan by using other income. The SBA will allow you to get an unsecured personal loan for your needed down payment if the debt from the loan can be sustained outside the business, not counting salary. As an example a retired police officer who is receiving a pension could get a loan for help with the down payment if he qualifies with enough pension income.

Get a gift.  The SBA will allow a rich uncle or a rich anyone to give you a gift for down payment money. A gift letter needs to be completed and an affidavit needs to be signed stating that this is a gift. The SBA will also need to see evidence that the gift was available and transferred into your account.

Seller Equity If you are buying a business a 25% "equity injection" is normally required. This equity normally comes from the person buying the business but the Seller can contribute funds to help meet this 25% requirement. (Seller equity is defined as seller take-back financing that is on full standby (principal and interest) for a minimum of 2 years.) With Seller Equity the borrower and seller will agree to how much equity each will provide. For example, the borrower and seller may each provide half of the equity or the borrower may provide 10% and the seller may provide 15%. Total must equal 25%.  

Other Standby Debt Other debt that is on full standby (no payments of principal or interest for the term of the SBA-guaranteed loan) may be considered acceptable equity for SBA’s purposes.

A debt that is on partial standby (interest payments only being made) may be considered equity when there is adequate historical cash flow available to make the payments.

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