Capital Structure
Using Family or Benefactor Capital in an SBA-Financed Acquisition
How a gift, loan, bridge, or line of credit from a private capital source interacts with SBA 7(a) equity-injection and debt-coverage rules.
The short version
When a private source — a family member, a benefactor, any outside party — helps fund the buyer's side of an SBA-financed purchase, there are only two questions the SBA cares about, and they have different answers.
1. Does it count as the required equity injection? (The SBA requires the buyer to put in ≥10% of the deal.) Only the buyer's own cash or a true gift cleanly counts. Borrowed money generally does not, unless it is on full standby.
2. Does it add to the loan payments the business must cover (DSCR)? Only if the capital requires payments during the SBA loan term. A standby or balloon note with no payments until later does not affect coverage.
The clean structure: cover the required 10% with cash or a gift, and provide the rest as a full-standby balloon note at the applicable federal rate (AFR). It reduces the SBA loan, never touches the monthly coverage math, and gets repaid later on refinance — so the benefactor is genuinely repaid, with interest, and the deal still underwrites cleanly.
The 10% equity injection
On a full change of ownership, the SBA requires the buyer to inject at least 10% of total project cost. Qualifying sources:
- Own cash — must be sourced and seasoned (shown on bank statements).
- A gift — allowed, documented with a gift letter (stating the funds are a gift with no expectation of repayment) plus evidence of transfer.
- A seller note on full standby — can count for up to half of the 10% requirement, if it is on standby (no payments) for a defined period, commonly 24+ months.
- Borrowed funds generally do not qualify as the injection, unless the debt is on full standby and repayable from a source other than the business. Lenders vary; confirm before relying on it.
Two paths for outside capital — pick per dollar
Path A — Gift
- SBA: cleanest; counts fully toward the 10% injection; no effect on debt coverage.
- Tax: a gift above the annual exclusion uses the giver's lifetime gift-tax exemption and is reported on IRS Form 709 (usually no tax due, but it consumes exemption). No interest, no repayment.
- Use when: you need dollars to count as the required injection and the giver is genuinely fine never being repaid.
Path B — Loan (standby / balloon)
- Structure: a written promissory note, interest at or above the AFR (below-AFR loans create imputed-interest and gift-tax issues), on full standby — no principal or interest payments during the SBA loan term — with a balloon due later or on refinance.
- SBA / coverage: because there are no payments during the term, it does not affect DSCR at close. Whether it can also count toward the required injection depends on the lender treating it as genuine standby — many will for the portion above the 10% minimum; some will count a fully-standby note toward the minimum too.
- Tax: not a gift (no exemption used); the benefactor is repaid with interest. Charging AFR keeps it clean.
- Use when: the capital source wants to be repaid, and/or you want to preserve the giver's gift-tax exemption. This is the right structure for the bulk of a large bridge.
The recommended split
- Required 10% injection: cash, or a modest gift (gift letter).
- Everything above that: a full-standby, balloon, AFR-interest note. It lowers the SBA loan, stays off the coverage math, and is repaid on refinance once the business is stable.
- This mirrors sound leverage practice: the capital behaves like patient, self-retiring, payment-free money during the risky early years, then is retired from refinance proceeds.
What the lender will want to see
- For a gift: a signed gift letter, proof of transfer, and evidence the giver had the funds.
- For a loan: the executed note, a standby agreement (often the SBA's form), and confirmation of the standby terms.
- For any injection: sourcing and seasoning of the funds (statements), before close.
Common mistakes
- Structuring the help as a serviced line of credit with monthly payments — this both fails to count as injection and adds to the coverage burden. If it is a loan, make it standby/balloon.
- A below-AFR loan — triggers imputed interest and possible gift-tax treatment.
- Assuming borrowed funds count as the required injection — they usually do not unless standby; get the lender's position in writing first.
This primer is general educational information about the SBA 7(a) framework (SOP 50 10) and federal gift-tax basics; both change over time, and outcomes depend on your specific facts. It is not legal, tax, or lending advice. Confirm any structure with your SBA lender, a CPA, and counsel before relying on it.