SBA equity injection for a business purchase: the 10% rule and seller notes on full standby
Last reviewed Oct 20, 2026 against SBA SOP 50 10 8.1 (Lender and Development Company Loan Programs, with Technical Updates), effective Oct 1, 2026. Educational only; not a loan approval or advice.
Short answer
When you buy a business you don’t already own with an SBA 7(a) loan (an Initial Acquisition), SOP 50 10 8.1 requires an equity injection of at least 10% of total project cost, and it cannot be reduced (Appendix 15, Para. C.2.a).
- At least half of the required 10% must come from unlimited sources: your own unborrowed cash, gifts, a personal loan repaid from outside the business, unconditional grants or verified prepaid expenses.
- At most half can come from limited sources: a seller note or other debt on full standby (no principal or interest for the life of the 7(a) loan), and non-controlling minority investors.
- A seller note on partial standby (for example, 24 months) is not equity. It is debt, and its payments count against your DSCR.
1. What “total project cost” includes
SBA measures the injection against all costs required to become operational, regardless of the source of funds, except lines of credit and 504 loans. That covers the purchase price plus working capital, closing costs and other project costs. For an Owner Buyout the base is the purchase price in the purchase and sale agreement instead. Real estate bought with the business carries the same equity rule (Appendix 15, Para. C.2.a).
2. Worked example
| Item | Amount |
|---|---|
| Purchase price | $1,000,000 |
| Working capital | $60,000 |
| Closing costs and fees | $40,000 |
| Total project cost | $1,100,000 |
| Minimum equity injection (10%) | $110,000 |
| Maximum from limited sources (half), e.g. a full-standby seller note | $55,000 |
| Minimum from unlimited sources (your cash, gifts and similar) | $55,000 |
Two common ways this goes wrong:
- The seller note is on 24-month standby. None of it counts toward the $110,000, so all $110,000 must come from unlimited sources. The note is also debt, and its payments enter debt service coverage once they start. (Interest-only debt not on full standby is underwritten on an amortization of no more than 10 years; Appendix 15, Para. C.2.b.)
- The valuation comes in low. Total acquisition debt, including seller debt not on full standby, may not exceed the business valuation. Any price above the valuation must be covered by equity (Appendix 15, Para. A.4 and C.1). Limited sources may help fill that gap, but only on full standby (Appendix 15, Para. C.2.a). Ask your lender how it combines the gap with the 10% minimum for your deal.
3. Unlimited sources (no cap)
- Cash that is not borrowed, on the business’s balance sheet or from other sources such as a gift.
- Cash from a personal loan to a guarantor, if repayment can be shown to come from somewhere other than the business’s cash flow. Salary paid to you by the business does not qualify.
- Grants with no conditional repayment, clawback or other provision that could require repayment during the 7(a) loan term.
- Eligible prepaid expenses the lender verifies with paid invoices, canceled checks or bank statements. Fees paid to an Agent and costs of education or advisory services are not eligible.
Source: Appendix 15, Para. C.2.a.
4. Limited sources (together, at most half)
- Seller debt that is subordinated to the lender and on full standby for the term of the 7(a) loan.
- Other standby debt on full standby, documented on SBA Form 155 or the lender’s equivalent, with the note attached. Standby debt may accrue interest and be paid after the 7(a) loan is repaid. The standby creditor must subordinate its liens and cannot take an equity stake.
- Non-controlling minority equity: an investor with less than 20% who exerts no control, whose investment cannot be repaid or recovered before the SBA guaranty is released. Until the loan is paid off, distributions to that investor are limited to tax distributions.
Source: Appendix 15, Para. C.2.a.
5. When the 10% can be lower
Only outside an Initial Acquisition. For a Business Expansion or an Owner Buyout, the lender may reduce or eliminate the injection if the borrower has enough liquidity and working capital to sustain operations, and its balance sheet did not show negative net worth at the last fiscal year-end. If the requirement is eliminated, the lender cannot add dedicated permanent working capital in any 7(a) term loan within 90 days. An ESOP buying a controlling (51%+) interest has no SBA equity requirement (Appendix 15, Para. C.2.a).
6. How equity and DSCR interact
Every extra dollar of equity reduces the loan and its payments, so equity is also the main lever when a deal falls short on cash flow. SOP 50 10 8.1 expressly lets the buyer add unlimited or limited equity to meet the DSCR minimum (Appendix 15, Para. C.2.b). The DSCR guide shows how much a shortfall can cost.
Frequently asked questions
What is the SBA equity injection for buying a business?
For an Initial Acquisition, at least 10% of total project cost, meaning all costs required to become operational regardless of who funds them, except lines of credit and 504 loans. For an Initial Acquisition the lender cannot reduce or eliminate it (SOP 50 10 8.1, Appendix 15, Para. C.2.a).
Can a seller note count toward the SBA down payment?
Yes, but only if it is subordinated to the lender and on full standby, with no principal or interest paid, for the whole term of the 7(a) loan. Seller debt, other standby debt and non-controlling minority equity together may supply no more than half of the required injection (Appendix 15, Para. C.2.a).
Does a seller note on 24-month standby count as equity?
No. SOP 50 10 8.1 counts seller debt as equity only on full standby for the term of the 7(a) loan. A note on partial standby is debt, and once payments start they count in debt service coverage (Appendix 15, Para. C.2.a and C.2.b).
Can I borrow my SBA down payment?
Only in a narrow case: cash from a personal loan to a guarantor counts if repayment comes from a source other than the business’s cash flow, and the salary the business pays you does not qualify (Appendix 15, Para. C.2.a). Gifted cash that is not borrowed counts.
Can the 10% equity requirement be waived?
Not for an Initial Acquisition. For a Business Expansion or Owner Buyout the lender may reduce or eliminate it if the borrower has enough liquidity and working capital and did not have negative net worth at the last fiscal year-end; the loan then cannot add dedicated permanent working capital within 90 days. An ESOP buying a controlling interest has no equity requirement (Appendix 15, Para. C.2.a).
Do my due diligence costs count toward equity?
Out-of-pocket costs of the required financial due diligence reports can be passed on to the borrower, and funds the applicant spends on those reports can count toward the equity injection. Eligible prepaid expenses also count if the lender verifies them. Fees paid to an Agent, education or advisory services do not count (Appendix 15, Para. C.1 and C.2.a).
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Sources
- SBA SOP 50 10 8.1 (Lender and Development Company Loan Programs, with Technical Updates), effective Oct 1, 2026, Appendix 15: 7(a) Changes of Ownership (SBA document page)
- SBA Form 155, Standby Creditor’s Agreement