Where do you guys come up with your 5% equity injection for the SBA loans?

May 23, 2024

by a searcher from Louisiana State University - E. J. Ourso College of Business in Phoenix, AZ, USA

Where do you guys come up with your 5% equity injection for the SBA loans. Are there angel investors / firms that are centered around getting your SBA loan across the finish line. Please provide links or whatever information you have.

Thanks

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Reply by a lender
in Stuart, FL, USA

Hi Jeremy, there are a host of ways to get there but keep in mind, only 5% equity injection from the main sponsor is going to be a lender discretion decision. Some lenders will not even do this, others will. You can get there by having the seller hold a seller note for 5% of your required 10% equity injection. The seller note will need to be on a minimum of a 24 month standby for it to qualify toward your equity injection. As others have pointed out you can whittle your 5% amount down from there by bringing on investors however that is certainly going to be a lender discretion decision. Contrary to popular opinion there is no one lender that says “boom” give us 50 grand and we'll lend you enough money to cover a 7 or $8 million loan. When you hear stories like that, that is one situation where that borrower got a deal closed and it worked for that lender. Every deal stands on its own merit, and every deal has to be structured in a way that makes sense for the risk the lender is willing to take. There is no one-size-fits-all. How's the credit? How's the collateral? Is there outside income? Can we cross collateralize another entity? How long has the business been around? Are there customer concentrations? What are the buyers’ translatable experiences? What role will the investors play? Hope this paints a more clear picture for you let me know if you need assistance thanks.

Reply by an intermediary
from Clemson University in Raleigh, NC, USA

"Skin in the game" is a fallacy. If a business seller is materially misrepresenting or withholding information adverse to the buyers interest seller financing or other contingent payments are not going to stop them. They will accept the terms to get their funds at closing and not worry about the remaining payments. Unless explicitly stated you don't have an automatic right of offset anyway. Buyer's interests are not protected by contingent payments. They are protected in the seller reps and warranties.
Take the example of a business owner who knows how dire their situation is. They are or are soon to be at an unsustainable cash flow level. They sell using 90% seller financing and don't care if they receive any of it because all they want is to get out of their lease.
Seller financing should only be used as a tool to reduce buyer's equity injection (in the case of 5% making the buyer's internal rate of return double that compared to if they had to put 10% down), to lower capital costs for the buyer (and presumably increase total transaction value) or in rare instances to get a commercial lender on board in a marginal deal.
An additional use case for seller financing is tax planning on the seller's part, but I don't personally believe the receivables risk is worth the tax savings.

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