SBA still funds start-up businesses, 
but Equity Requirements have Changed

In the Inland Northwest, the number and size of SBA loans have continued to increase. Just don’t expect to get a loan to start a business without investing your own money into the venture. Gone are the days where you could get a loan with only a 10-20% injection of personal funds. Most of the lenders we talk to these days are requiring a 30% injection, unless the applicant is a dentist or veterinarian, and even those businesses can no longer get 100% financing. 

Further, SBA changed the rules in 2009 as to how home equity loans are considered as an equity injection. Basically, they will only consider it as a source of equity if the applicant has income outside the business that can pay the debt. Otherwise they consider it another obligation of the business.  Offering a house or other asset as collateral will not suffice either. Collateral is not the same as putting actual money into the business. Collateral is what you pledge as security for the loan, and what you can lose if the business defaults. The lender may require a lien on your home as additional security, but that does not take the place of a capital injection.

Why do they want the business owner to have more invested? It is quite simple. The more the business owner has invested of his own funds, the more likely the business is to succeed. That is because the owner is committed to the success of the company—they have a significant amount at risk as well as the lender and SBA. But, more importantly, the more money you have as equity, the less you have to borrow, and the less you will have to pay out to other people (lenders) to keep your business growing. 

What if you don’t have a lot of cash available? There are other options. For instance, if the entrepreneur is purchasing a business, and the seller is willing to wait to be repaid part of the sale proceeds, SBA may consider that as part of the injection. 

Do not borrow against your IRA or retirement funds unless you go through an approved program for investing those funds in your business. Otherwise, you could face penalties from the IRS that offset any profits you make. 

Another option is for the business to borrow funds from family or friends. If payments will not be made, including interest, during the term of the loan, those funds can be considered as equity. Most lenders still want the business owner to have some of his/her own funds at risk, since they want the business owner to be vested in the business, but this can help if you do not have enough equity of your own to qualify.

© Coralie Myers, SBA Business Solutions, Inc.