Can you raise outside capital with SBA 7a loan without a PG for investors?

September 19, 2022

by an investor from University of Pennsylvania - The Wharton School in Los Angeles, CA, USA

Hi everyone. I've read that the SBA 7a loan requires a personal guarantee for all owners >25%. Does that mean if I raise some equity from outside parties (likely HNWs) they will have to provide a PG on the loan? Can I limit to the PG to myself only? Are there structural ways around this?

Particularly interested in a self funded search with a purchase price >$5M that will require some additional equity alongside my own equity contribution.

Reply by a searcher
from INSEAD in New York, New York, USA

SBA 7(a) loans require personal guarantees (PGs) from all owners with ≥20% equity. You might want to consider these workarounds (especially as it relates to self-funded searches###-###-#### /10/10 model: Pair the SBA loan (80%) with seller debt (10%) and equity (10%). Limit investor equity to <20% per individual to avoid PGs. 2. Preferred equity: Offer investors non-voting preferred shares with capped returns, minimizing their ownership % in SBA calculations. 3. Lender negotiation: Some lenders may waive investor PGs if the primary borrower (you) provides sufficient collateral or demonstrates strong cash flow.

Reply by an investor
in Asheville, NC, USA

Each investor must stay under 20% ownership to avoid the PG. For reference though, we’ve had deals at CapitalPad where the searcher needed an equity check that is over the 20% threshold, so we just split up the investor group. I.e. if you have two investors that are 12.5% each (25% total), that is ok and they will not need to PG.

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