How to get around SBA's 20% rule

investor profile

February 27, 2020

by an investor from University of California, Berkeley - Haas School of Business in San Francisco Bay Area, CA, USA

SBA loans require every investor who owns more than 20% to sign a personal guarantee. Unfortunately, this is a non-starter for many investors. Are there any ways to legally structure around the 20% rule?

Some ideas:
1. Investor receives 30% but splits it between himself and his wife, so 15% each on the cap table.
2. Investors receives an option or a warrant
3. Agreement between searcher and investor that says the investor can purchase a certain number of shares from the searcher at a pre-set price at a later point

I'm not trying to do anything illegal or unethical, but want to understand what potential structuring options are.

1
10
355
Replies
10
commentor profile
Reply by a lender
in Yorba Linda, CA, USA
None of these will work if your lender is paying attention: 1) spouses are combined per SBA guidelines; 2. this maybe could pass, but the options and warrants could not be exercised until after the SBA loan was paid in full, and many lenders would still object to this and 3. any change of ownership after the SBA loan is closed (until it is paid in full) must be approved by the lender, lender would then require the PG of the investor in order to approve.
commentor profile
Reply by a lender
from Michigan State University in Newport Beach, CA, USA
Agree with the above. However, even if you make somebody a 19% owner, It is possible that the lender may still require a guarantee. Sba is starting to crack down on situations like this where you have a silent partner who simply wants to invest cash. We have heard from Sba that they now want material cash-infusing partners to be guarantors on the loan. This is not an official policy yet, but could be soon.
commentor profile
+8 more replies.
Join the discussion