One of the toughest challenges in SBA lending is training experienced conventional real estate lenders in 7(a). Faced with a loan request to purchase a building or equipment, their background tells them to look for a downpayment. They can spend hours with the SOP and CFR, all in vain.

Notice to real estate lenders transitioning to SBA lending: SBA policy does not require a down payment for projects using a 7(a) loan unless the loan is financing a change of ownership of the business. (SOP 50 10 7.1 pp. 111-112). SBA assumes that the 7(a) lender has commercial loan policies and procedures (whether specific to SBA lending or applicable to commercial lending in general) to address such issues as the percentage of the required downpayment.

Other than within its 504 loan policy, SBA doesn’t provide requirements for the downpayment or the required borrower contribution for purchasing a building or new equipment. The provisions that require discounting the values of real or personal property are collateral requirements used to determine whether a loan is fully secured. They don’t dictate the amount of downpayment.

Case in point: I had a call the other day from Carrie, a conventional real estate lender new to SBA:

CARRIE. Okay, Richard, My prospect wants to buy 100% of a business. How much down payment is required?

ME. If the project is financing a new owner buying 100% of a business, then it’s financing a “complete change of ownership.” SBA requires an equity injection of at least 10% of all costs required to complete the change of ownership.

CARRIE. That’s easy, 10% down.

ME. Careful, here. The key words are, “ … all costs required …” The trick is recognizing that the injection isn’t limited to 10% of the purchase price. There might be costs other than simply purchasing the business.

CARRIE. Last time I did one of  these, the business was owned by three different people, including my prospect, who was buying out just one of them. The downpayment wasn’t related to the purchase price then either.

ME. Well then, your project was the financing of a partial change of ownership, not a 100% buyout. So the required injection was based more on the balance sheet, not on the project costs. Instead, you obtained the business’ balance sheets for the most recently completed fiscal year and the current quarter. They had to reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership AND the remaining owner had to certify that it had actively participated in the business operation and held the same or increasing ownership interest for at least the past 24 months.

If even one these requirements wasn’t met, the remaining owner(s) had to contribute cash sufficient to reflect a debt-to-worth ratio of no greater than 9:1 on the pro forma balance sheet OR at least 10% of the purchase price of the business, as reflected in the purchase and sale agreement, whichever was less.

CARRIE. Now, you’ve got me. I’m confused.

ME. Check the year-end balance sheets for the last fiscal year and for the most recent quarter-end. What’s the debt-to-worth ratio for both? If the ratio is 9:1 or less and the interests of the remaining owners are the same or have increased in the last 24 months, then no borrower contribution is required. But if you cannot meet both conditions, then the remaining owners must contribute cash resulting in a debt-to-worth ratio of 9:1 or less.

CARRIE. Thanks so much, Richard. I’m confident I can take it from here.

ME. Now go tell all your colleagues in the commercial real estate loan department that you can finance a change of ownership using an SBA 7(a) loan. They’ll be impressed with your advanced knowledge!

Richard Jeffrey, Senior Associate
Chief Underwriter