When a small business is seeking certain loans through the U.S. Small Business Administration (SBA), they may be required to provide an equity injection in order to secure the funding.
An equity injection is a down payment from the business owner and shows their commitment to repaying the loan.
Learn more about an SBA loan equity injection and how this may help your business financing options below
An equity injection or SBA loan down payment is required for many SBA loans in order for the borrower to show that they are committed to repaying the loan. The borrower will provide a lump sum of cash to the lender upfront.
In terms of SBA loans, the amount of the down payment is calculated as a percentage of the project you will use the money for, and not the amount of the loan itself. So for instance, if you are applying to borrow $300,000 through an SBA 7(a) loan for a project that will cost $500,000, you will be asked to provide an equity injection of $50,000 as 10% of the project’s total cost.
Each SBA-approved lender will determine how much of a down payment they require based on your qualifications and what you intend to use the loan for. For many SBA loans, the lender can ask for as much as 30% for an equity injection, although most SBA loan down payments fall between 10-20%. The better your qualifications – your time in business, number of assets, credit score and debt-to-income ratio – the better your chance of having a lower down payment requirement.
As of 2023, an equity injection or SBA loan down payment is required for the following SBA business loan programs:
For businesses that are just starting out, meaning they have fewer than two years of business under their belts, the SBA asks for a down payment of at least 10% of the project cost. This number may not correlate exactly with the loan amount, but instead with how much the project you wish to use the loan on will cost in total.
If you are planning to use an SBA 7(a) loan to purchase a business outright, the SBA will ask for at least 10% of the total project cost as a down payment. In special or limited-use properties, they may as for up to 15%.
If you are buying a partner out of your business, the equity position after the change of ownership must add up to at least 10% of the total assets of the company. If not, you will have to provide an equity injection of at least 10% of the net worth of the business. If your lender approves, you can borrow up to 100% of the cash being paid to the partner you’re buying out.
If you’re using a SBA 504/CDC loan to buy heavy equipment, such as manufacturing equipment, farm equipment or a fleet of trucks, you will usually be asked to provide at least a 10% down payment.
Another use of an SBA 504/CDC loan is to improve commercial property through remodeling or other means. In this case, most lenders will ask for a down payment of 10-20%.
The money for an SBA loan down payment or equity injection needs to come from a source outside of the business’s cash flow, per SBA guidelines. In order to provide the lump sum necessary for an SBA loan down payment, a small business owner can turn to many sources. The most common include:
Personal savings or liquid cash available in a checking account are common places for small business owners to find the money they need to make an equity injection. Some small business owners will take out personal loans to cover the cost of the equity injection, although you will need to discuss the terms with both lenders. Another way borrowers can get liquid cash to provide a down payment is by taking out a cash advance from their credit card, although these tend to have very high-interest rates and may not be a good idea for all borrowers.
Many investors may be interested in buying shares in your business to help you get the money you need to secure an SBA loan through an equity injection. The SBA-approved lender who provides your loan may want to make sure the investor has sound personal finances. You may also consider crowdfunding or asking family or friends to donate money to help you raise capital.
Business partners are another type of investor that may offer a good way to raise funds in order to make an SBA loan down payment. Similarly to other investors, they may ask for shares or equity in the business as compensation for the investment. If your business partner is a friend or family member, they may be willing to provide the money as a gift.
You may be able to generate capital by selling personal property like stocks or bonds. You may also be able to use a line of equity on your personal home mortgage. Retirement funds such as your 401k or IRA may allow you to make Rollovers as Business Startups (ROBS) transactions as well. It’s a good idea to discuss any major financial decision around your retirement with a financial advisor.
In many cases, the SBA will allow you to use the value of business assets such as equipment or property to stand in as your down payment. In order to do this, your business must be at least two years old and the SBA will require a recent appraisal of the asset or assets. They may require a third-party appraisal if the value of the assets is determined to be more than their net book value.
In some cases, the SBA-approved lender may allow you to use equity from the individual or business selling the item you’re going to use the loan for, namely real estate or another business. In this case, the seller provides a note on standby, meaning that they don’t accept payment until later. If you’re using the SBA loan to buy a business and want to use this form of equity injection, the lender will usually require the seller to provide the note on standby for at least two years.
If you have calculated the cost of an SBA loan down payment and found that there’s no way you could cover the cost, you have a few options.
The SBA offers a number of loan programs that don’t require a down payment. SBA microloans and export loans don’t require a down payment. However, microloans tend to be much smaller than other SBA loans and the export loans have specific use cases. If you qualify, you may be able to use this loan, although it may not be for the project you originally intended.
Many small businesses may wait to apply for an SBA loan until they are better qualified for it, which can include saving up until you have enough to cover the down payment. This also gives you time to improve your credit scores and get more time in business, both of which make you more attractive to SBA lenders.
There may be other types of loans or financing available for you outside of SBA loans. These options may be more expensive than an SBA loan based on their interest rates and repayment terms, which will all depend on your qualifications such as credit score, time in business, cash flow and other factors.
If you still need funding and can’t afford an SBA down payment, check out these other financing options.
You may be able to secure a traditional loan from a bank or credit union or use an alternative or online lender. Many of these options are more expensive than an SBA loan, meaning they may have higher interest rates and shorter repayment terms. A down payment makes you appear less risky to a lender, and lenders who are willing to give loans to riskier borrowers tend to have higher costs. Your credit score, time in business, revenue, cash flow and business plan will all determine what kind of rates you can get, and it’s important to understand fees that may apply.
Loans aren’t the only way that small businesses can get money for their company projects. Small business credit cards can give you quick access to money for everyday purchases such as office supplies or equipment. Credit cards are often easier to qualify for than traditional loans, and many of them can help you build your credit, as long as they report to the major credit bureaus. You may also be able to earn points or cash back on items you buy frequently, like office supplies, company phone bills or gas for company cars. It’s important to keep an eye on the annual percentage rate (APR) of your credit card and make sure you pay monthly minimums, as the interest can get much more expensive than other types of loans or financing.
A business line of credit can also help you get cash for expenditures like commercial mortgage payments or rent, which often can’t be paid with credit cards. The SBA CAPlines program is a line of credit for small businesses and can offer as much as $5 million. However, all of these options may come with high interest rates, which can add up if you can’t pay your statement off every period.
If your business does a large amount of its transactions via credit card, you may qualify for a merchant cash advance (MCA). In this scenario, the financial institution gives you a lump sum of money which you may back with a pre-set percentage of your credit card sales, usually at the end of every day. While an MCA is a quick way to get cash for a company, the interest rates and fees can add up quickly, and they aren’t available if your business doesn’t make a lot of sales through credit card transactions.
Use Swoop to find out more info on which SBA loan program is best for your business. Just download the Swoop app, answer a few questions and get matched to the programs or funding you’re most likely to qualify for.
Written by
As a B2B finance content specialist, Kat Cox's goal is to distill complicated financial issues into useful information for small business owners, to save them time they could be using to build their companies. Her work has been featured in Forbes and on financial health platform Nav.com. When she's not writing blogs, web copy, or fiction, Kat can be found walking her dog or singing karaoke in Austin, Texas.
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