Seller Financing and the Impact on Equity Injection Requirements

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by a searcher from Washington University in St. Louis
in Austin, TX, USA

9mos ago

Seller Financing and the Impact on Equity Injection Requirements

I am trying to interpret the SBA rule changes in SOPredactedand how seller financing impacts the 10% equity injection requirement for 7(a) loans. Do the new rules imply that a buyer cannot get a seller note for more than 5% unless the note is on full standby to the SBA loan? Is there any way to avoid that?

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reply by an intermediary 9mos ago
from University of Iowa in Kansas City, MO, USA

You are correct, the SBA does not allow earn-outs, post-sale increases in purchase price, or any payment to the seller in excess of what is stated in the purchase agreement. He may be referring to a structure that results in downward adjustment of cash to seller, typically in the form of a forgivable seller note. Also, if the seller rolls any equity, regardless of the amount, they are required to guarantee the loan for two years with no exceptions. If they roll 20%+ then the typical SBA guarantor rules apply.

reply by a searcher 9mos ago
from Concordia University, Irvine in Orange, CA, USA

How much more complicated does it get to incorporate investory capital into the mix? If the investor step-up is kept under 20% equity, anything to keep an eye out for.