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.

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I agree with Robert except on the key management. If there are key employees that do not have an ownership interest in the acquisition, it depends on which SBA lender. Most will not require personal guarantees for those employees but some will. Also, the percentage of equity invested does not need to match their ownership interest in the business. So someone can invest 50% of the equity but only end up with a 10% ownership interest. The guarantors are taking on more risk with their personal guarantee and operational risks, so that can offset the equity. Happy to have a discussion about your specific scenario at any time at redacted

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.

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