SBA Tip # 4
How to Protect Investors/Partners
By Stephen Mariani
When the buyer needs additional down payment monies and brings in a partner, there are ways to protect them.
The SBA requires any borrower (or owner in the new corp.) with a 20% or more ownership concern to personally guarantee the entire loan and pledge any available collateral that they may have up to the point that the loan is fully secured.
With the above rule in mind, the way to limit the investor’s exposure to only the money he injects (and/or the collateral they pledge) is to be sure they remain under the 20% outlined above.
Why you need to know this and how to truly present it to a lender
Typically this is utilized when lender feedback requires a larger down payment or some additional collateral to secure the loan. If the lender comes back and says they can approve your loan request with an increase in down payment or with some form of additional collateral, this is the best way to protect an outside investor. We recommend keeping that new partner to no more than a 15% ownership position and here’s why. With that partner having actual ownership in the new business it is allowable to have the “minority partner” contribute the down payment directly into the deal. This does NOT have to be in the exact ratio as the ownership percentage and the minority partner, as an example, could be injecting 100% of the required down payment amount. Minimal paper will be required of this investor and his or her personal guarantee should not be required. One caution would be to make sure you address this upfront with your lender and explain that the potential partner’s assets (over the required amount) will NOT be available and they cannot require anything additional to what was agreed to. Over the years we have found that many lenders, (once exposed to an investor’s PFS) will then try to convince a borrower to have them pledge more than agreed to upfront.
If the buyer is successful in securing a partner or investor, it has always been our opinion to protect them whenever possible. Many times this investor or partner is a Mother, Father or other family member that chooses to limit their exposure to only what they choose to inject.