I always like to begin by referring to the actual rule before describing how our firm addresses these scenarios.
“When deemed necessary for credit or other reasons, SBA or, for a loan processed on a delegated basis, the Lender, may require other appropriate individuals to provide full or limited guaranties of the loan without regard to the percentage of their ownership interests, if any. For example, an individual with a minority ownership or no ownership interest in the Applicant or OC who is critical to the operation of the business may be required to provide a personal guaranty.”
SOP 50 10 5 K Subpart C, Chapter 3, (I) (E) (1)
” … For example, an individual with a minority ownership or no ownership interest in the Applicant or OC who is critical to the operation of the business may be required to provide a personal guaranty”
There are two ways that we suggest a silent investor to inject funds into a project. The first is a straight gift, which will be accompanied by a notarized gift letter, from the giftor, stating this is a gift and repayment is never required. This option is not our favorite method, but it is effective when parents want to assist a son or daughter in purchasing a business. This method is the most effective and makes the most sense when the money being gifted is coming from a close family member. Logically speaking, what friend actual gifts another friend a few hundred thousand dollars to buy a business. Lenders consider this question when reviewing the injection. However, there is a second, better method, that we prefer.
A friend/investor may have actual ownership in the new entity. This investor has now became a “minority partner” and as long as their shares remain under the 20%, a personal guaranty should not be required. As an example, if the friend/investor owns 10% of the new entity, they are permitted to inject 100% of the down payment as an “owner” of the new business. We must document this investor’s intentions and the involvement in the new entity, if any. We then must determine if they will be involved in any way and must show they are truly “silent” before application submission.
This rule is important to understand, as it is subject to the interpretation of the lender and many read it differently. I know many lenders that demand any person injecting funds into the project to also fully guaranty the loan, no matter what amount of ownership or involvement they might have. Lenders are permitted to demand this, and add any additional underwriting criteria they deem necessary, to secure an internal approval as long as the minimum SBA rules are followed.