Best Practices: Minimum Equity Injection Requirements Under SOP 50 10 8.1 Technical Policy Updates

The SBA issued SOP 50 10 8.1 Technical Policy Updates, effective October 1, 2026.  For all loans approved by the Small Business Administration (“SBA”) on or after October 1, 2026, all lenders must follow equity injection rules and requirements set forth in SOP 50 10 8.1 Technical Policy Updates.  Lenders processing loans through Preferred Lender Program (“PLP”) authority and the SBA processing lenders’ loans through non-delegated authority must decide if there is sufficient equity injected by determining “if the equity position, any required equity contribution, and the pro forma debt-to-worth are acceptable based on the factors related to the type of business, experience of management and the level of competition in the market area.”  (SOP 50 10 8.1 Technical Policy Updates at p. 200).  Lenders must discuss this analysis in their credit memos.

Below is a brief summary of minimum equity injection requirements for start-up businesses, initial acquisitions, owner buyouts, business expansions and ESOPs, as well as limits on the sources of equity injection.

Start-Up Businesses

All 7(a) loans made to start-up businesses require minimum equity injection of at least 10% of total project costs.  A start-up business is defined as a business that “has been in operation (i.e., generating revenue from intended operations) for 1 year or less” and project costs are defined as “all costs required to become operational, regardless of the source of funds.”  (SOP 50 10 8.1 Technical Policy Updates at p. 200).  Lenders can certainly require additional equity injection for start-up businesses as the SOP sets forth minimum requirements.

Changes of Ownership- Initial Acquisition

7(a) loans for Initial Acquisitions require minimum equity injection of at least 10% of total project costs plus any other uses of proceeds in the loan request.  Initial Acquisitions are defined as “[a] change of ownership transaction that results in a new majority or largest individual owner who was not previously a direct or indirect owner, or an individual who has been employed for fewer than 24 months [buys] the business being acquired.”  (SOP 50 10 8.1 Technical Policy Updates at p. 365).  For Initial Acquisition 7(a) loans, the minimum equity injection requirement cannot be reduced or eliminated.

Changes of Ownership- Owner Buyout

For 7(a) loans for Owner Buyouts, the equity requirement of 10% is based upon the purchase price of the business set forth in the purchase agreement.  An Owner Buyout is defined as “[a] change of ownership transaction that modifies the ownership structure of the Applicant business and does not involve the acquisition of another entity or asset. At least one member of original ownership must remain in place following the transaction and guarantee the loan, regardless of the percentage of ownership post-sale, unless otherwise outlined below [in the SOP]”.  (SOP 50 10 8.1 Technical Policy Updates at p. 366).  In addition, “individuals not currently employed by the business for a minimum of 24 months may only acquire less than 50% of the total equity and may not become the largest direct or indirect shareholder.”  (SOP 50 10 8.1 Technical Policy Updates at p. 366).  If this condition is not met, then the 7(a) loan will be treated as an Initial Acquisition.

If the 7(a) loan qualifies as an Owner Buyout, then the lender has discretion to reduce or eliminate the 10% injection if they determine that the Borrower has sufficient liquidity and working capital to sustain business operations following the sale and the balance sheet does not have a negative net worth as of the last fiscal year-end.  If the lender does reduce or eliminate the 10% equity injection requirement, then the Borrower is not permitted to receive working capital as part of the 7(a) loan proceeds except for a de minimis amount which shall not exceed $10,000.00, or one half of one percent of the loan amount, whichever is greater.  In addition, no dedicated permanent working capital may be added to this or any other 7(a) term loan within 90 days.  The same rules apply when a lender reduces or eliminates the injection for a Business Expansion.

Business Expansions

7(a) loans for Business Expansions require a minimum equity injection of 10%.  The business must have operated for at least two full fiscal years under its current ownership and be acquiring a business in the same NAICS Industry Group (four-digit) as the Borrower.  As with Owner Buyouts, the lender has discretion to reduce or eliminate the 10% injection, subject to the requirements and working capital limits described above.

Loans to ESOPs

Loans to Employee Stock Ownership Plans (“ESOPs”) to purchase a controlling interest (at least 51%) in the employer small business or loans to the employer small business used to re-lend to the ESOP to purchase a controlling interest (at least 51%) in the employer small business are not subject to SBA minimum equity injection requirements.

Cooperatives and Sources of Equity Injection

7(a) loans to cooperatives require a minimum equity injection of 10%, which cannot be reduced or waived.  For all transaction types, no more than half of the required equity injection may come from limited sources, such as full standby seller notes, other standby debt and minority investors.  At least half of the required equity injection must come from unlimited sources.

For assistance with SBA lending matters, contact the attorneys at Starfield & Smith, P.C. at 215.542.7070 or visit us at www.starfieldsmith.com.