SBA 7a Loan : adding member retroactively

September 09, 2024

by a searcher in Illinois, USA

Hello,

We acquired a business using have SBA 7 am loan last year. We would like to add a member retroactively to the entity and offer him 15% equity from year###-###-#### We plan to add him to entity by amending the articles of incorporation.

I am curious if this something needs to be reported to lender as well as SBA ? and are their any legal issues or would IRS flag it ?

Thanks in advance.

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

^redacted‌ thank you for the tag. Technically if you make any change to the ownership you must inform your bank. If it is within the first year of the loan, you must inform the SBA as well. The challenge you can run into is if they invest into the entity, the SBA could want those funds to pay down the loan versus the money going to partners or into the company as working capital. If you do not notify the lender they will see the change in ownership if you provide your annual corporate tax returns to them. They will likely question you on what happened at that time. However, if you are current on your loan at the time, it is unlikely they would take any action against you. If the new owner ends up with 20% or more of the equity, they will require them to guarantee the loan. I hope this helps. Happy to discuss if you want more information. Good luck.

Reply by a searcher
from Rutgers in Philadelphia, PA, USA

I had this conversation for one of my SBA loans. My lender said as long as you're transferring less than 20% of ownership, there's no issue from them, but they do need to review the equity agreement and the revised operating agreement for the LLC. Anything 20% or more would be quite complicated, as that would essentially be a loan modification with a new personal guarantor. This was more than 12 months into our loan term so I can't speak to the 12 month SBA notification requirement that others mentioned.

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