Structuring Minority Investor in SBA 7(a) Deal — Seeking Advice

searcher profile

June 02, 2025

by a searcher from Vanderbilt University in Nashville, TN, USA

I'm acquiring a $640K home services business using an SBA 7(a) loan. I have a strategic minority investor - he owns a large real estate brokerage and will help drive leads post-close. He’d like 20–25% equity, but the business is small, so he’d only be investing ~$50K. The issue: at his desired equity level (20%+), the SBA would likely require a personal guarantee (PG) and possibly even collateralization of his primary residence, which he understandably wants to avoid. We’re currently modeling 15% equity with no PG, plus a potential interest-only loan from him of $50K–$100K to boost working capital. That part works. However, it doesn't get him the distribution upside he’s targeting long-term. I’ve considered structuring a convertible note, where his debt converts to equity after a few years but I’m fairly certain the SBA prohibits any ownership changes until the 7(a) loan is repaid (which could be 10 years out). Any creative ideas to: Give him more upside without tripping SBA ownership/guarantee rules? Increase his economic participation without immediate equity or PG? He owns several other LLC entities and his wife does as well - if this unlocks anything. Thanks in advance.
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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great question. The SBA will not allow any changes of ownership or increases in ownership during the term of the loan. So you are going to be limited in your options. I think your best bet would be to keep him below the 20% level and possibly provide him a higher return. However, please keep in mind that any potential return cannot have a requirement to be paid until after the SBA 7A loan is repaid. So it could be a long-term investment for him. You cannot use his wife because they will look at spousal interest on a combined basis and it will bring their combined household ownership over 20% requiring the guarantee and pledge of personal assets. Please let me know if you would like to discuss in more detail. You can reach me here or directly at redacted
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Reply by a lender
in Falmouth, MA, USA
Issuing debt is fine. But I would avoid a convertible note if the owner stays under 20%. That threshold matters. Happy to share a few options to consider. redacted
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