Documenting Equity Injection for an SBA 7(a) Loan

Most loans for the purchase of business assets, i.e., real estate, equipment, an existing business, etc. require that the borrower provide some sort of cash equity injection or down payment. SBA is very particular in this regard and the amount and specific use of the equity injection will be clearly spelled out in the Loan Authorization.

Proof that the borrower has provided the correct amount of equity injection in a particular transaction must be documented to SBA standards or risk a repair or denial of the guarantee in the event of liquidation. The following should be collected prior to closing and kept in the borrower’s file:

-Proof that the equity injection was used for the stated purpose in the Loan Authorization. If the stated purpose is for the purchase of real estate for example then the money cannot be used to pay closing costs or any other purpose. If necessary we can ask SBA to change the stated use to fit particular circumstances, however this must be done prior to closing.

-Verify the cash injection by obtaining the following documentation (excerpt from the current SOP):

1. A copy of a check or wire transfer along with evidence that the check or wire was processed showing the funds were moved into the borrower’s account or escrow;

2. A copy of the statements of account for the account from which the funds are being withdrawn for each of the two most recent months prior to disbursement showing that the funds were available; and

3. A subsequent statement of the borrower’s account showing that the funds were deposited or a copy of an escrow settlement statement showing the use of the cash.

-In the event that a “gift letter” is used as the borrower’s source of a cash injection, the above documentation must be obtained for the person supplying the gift.

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