May 31, 2017

Best Practices: Documenting Equity Injection to Protect Your Guaranty

by Lyndsay E. Rowland

When a lender requires an equity injection under the terms of the SBA loan the lender is extending, it is imperative that the lender ensures that it is properly documenting the equity injection in accordance with SBA loan program requirements. In the event of an early default loan (one that defaults within the first 18 months) a lender’s failure to properly document the equity injection to show that the funds were injected prior to loan disbursement will typically result in a recommendation for a full denial of the SBA guaranty.

The SOP 50 10 5(I) states, ” Lenders must verify the injection prior to disbursing loan proceeds and must maintain evidence of such verification in their loan files.” 13 CFR ยง120.150. This requires that lender have a copy of the check or the wire evidencing that the equity was actually injected into the business and evidence that the form of payment was processed; copies of statements from the account(s) from which the funds came for the prior two months showing that the funds were available (and the source of any funds deposited into such account); and a subsequent statement of the borrower’s account showing that the funds were deposited into the business account or a copy of the settlement statement showing that the funds were used at closing. In the case of a gift, then a gift letter must be obtained and retained in the loan file, along with copies of account statements showing the source and transfer of the gifted funds to the borrower before disbursing the loan proceeds.

In general, it is critical that lenders can document equity injection from settlement all the way back to its source. This may necessitate requiring additional documentation in order to properly trace the funds. If the lender is missing documentation evidencing the existence and source f the equity, then a rebuttable presumption arises that the failure to properly document the equity injection was the cause of the failure of the business and the default on the loan. Documentation deficiencies can quickly turn into a serious situation for lenders in the event that their SBA loan defaults early. Accordingly, lenders should be rigorous in their due diligence to ensure that their proof of equity injection complies with SBA’s requirements.

Additionally, Lenders should conduct a post closing compliance review for each closing file as soon after the loan has closed to ensure that they have full copies of bank statements for all involved bank accounts and copies of all wires and/or checks. A timely post closing review will maximize the likelihood that any documentation deficiencies can be corrected and that the lender will be able to present a complete and compliant guaranty purchase package to the SBA.

For more information on properly documenting equity injection for SBA loans, please contact Lyndsay at 267-470-1154 or at