New SBA Equity Injection Rules

New SBA Equity Injection Rules

As of June 1, 2025, SBA loans for startups and changes of ownership will require a minimum 10% equity injection of total project costs. While the SBA made significant changes it allows for exceptions for business expansion.

Startup Loans

The 10% equity injection must cover total project costs (e.g., purchase price, fees, working capital).

Cash: Paid by the borrower using savings, a Home Equity Line of Credit (HELOC), or gifts (accompanied by a gift letter confirming no repayment obligation). Verified through recent account statements.

Franchisee Fee: Any franchisee fees paid do not count towards the equity injection requirement.

Change of Ownership Loans:

  • Business purchases

  • Expansion acquisitions

  • Complete or partial partner buyouts


Business Purchase

The 10% equity injection must cover total project costs (e.g., purchase price, fees, working capital).

Cash: Paid by the borrower using savings, a Home Equity Line of Credit (HELOC), or gifts (accompanied by a gift letter confirming no repayment obligation). Verified through recent account statements.

Seller Note: Optional seller financing on full standby (no principal or interest payments for the entire SBA 7(a) loan term) can cover up to 50% of the required injection (typically 5% of the 10%).

  • Must be subordinated to the SBA loan.

  • Cannot include acceleration clauses.

  • Partial standby notes with interest-only payments are not allowed.

Exception for Expansion Loans

The SBA provides and exception to the equity injection rule for expansion acquisitions. Most advisor borrowers qualify for expansion acquisition criteria, thus providing a path for many advisors to receive 100% SBA backed acquisition loans.

No equity injection required if all 3 of these requirements are met:

  • The target business operates under the same 6-digit NAICS code as the existing business.

  • The businesses are located in the same geographic area (for advisors it covers multiple states you're currently servicing clients).

  • Both businesses have identical ownership structures (same owners, same percentage breakdown).

If these conditions are not met, the standard 10% equity injection applies.

Partner Buyouts

Partner buyouts, whether complete or partial, have specific equity injection rules due to their operational impact.

Equity Injection Requirements:

The SBA requires the lesser of:

  • A 10% equity injection of the purchase price (e.g., $50,000 for a $500,000 buy-in), OR

  • An amount needed to achieve a debt-to-worth ratio of 9:1 or lower on the pro forma balance sheet (based on the most recent fiscal year and quarter), unless exempted.

How to Calculate the 9:1 Debt-to-Worth Ratio:

Debt-to-Worth Ratio = Total Debt ÷ Total Equity

  • $500,000 debt ÷ $100,000 equity = 5:1 (pass, no injection needed)

  • $1.2M debt ÷ $100,000 equity = 12:1 (fails, requires injection to reduce risk)

A ratio ≤ 9:1 indicates financial stability, potentially waiving the injection. Above 9:1 (e.g., $1.2M debt ÷ $100,000 equity = 12:1) requires the injection to reduce risk.

No Equity Injection Required If:

  1. The borrower has been an active operator with at least 10% ownership of the business for 24+ months, verified by both buyer and seller.

  2. The business has a debt-to-worth ratio of 9:1 or lower (e.g., $900,000 ÷ $100,000 = 9:1).

Equity injections must be paid in cash—SBA rules don’t allow seller financing for this requirement. A seller note can be included in the deal, just not as part of the equity injection.

Guaranty Requirements:

  • After the buyout, owners with 20% or more direct or indirect equity (including sellers in partial buyouts) must provide unlimited personal guaranties.

  • Sellers retaining less than 20% equity must guarantee the loan for 2 years post-disbursement.

  • In ESOP transactions, sellers with partial ownership must provide full, unlimited guaranties regardless of their equity percentage.

For Change of Ownership Loans, Think Inside the LoanBox

Change of Ownership loans dealing with business acquisition, expansions and partner complete and partial buy-outs is more complicated than your run-of-the-mill working capital loan. The value of our streamlined LoanBox platform and our seasoned LoanBox Advisors shines the more complex the loan and the larger the loan amount. Our consulting is relaxed, unbiased, and straight-up candid. We can help you compare SBA and conventional options, and navigate everything surrounding the financing of your change of ownership loan.

The current equity injection requirements go into effect June 1, 2025.

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