Ball Park Conventional Loan Ratios?

searcher profile

August 18, 2024

by a searcher from Sophia University in The Woodlands, TX, USA

Hi All,
I am a day or so away from a signed LOI when I will begin due diligence. And now trying to use my pre-DD stage effectively.
I am looking at a $4 million manufacturing co acquisition.
$2.5 mil for co,
$700K in inventory and an additional
$800k in Working Capital requirements.

Although I have a bit of a cash buffer, I would like the bulk of the purchase to come from conventional financing without any SBA involvement.
What would be a reasonable percentage of the purchase price I can expect from a conventional lender?
There’s also about $1.2 mil in equipment included in the purchase.
thanks, john

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I would be happy to have a discussion here and provide some feedback. Your biggest issues with conventional financing is lenders are typically conservative on deals of this side based on cash flow, collateral, and loan-to-cost. Typically we are seeing loan-to-cost maximum at 50% t0 65%, but we are also seeing lenders be conservative on the amount of collateral. If a lot of the value is going to goodwill, that can make it more challenging. You also will typically need a debt service coverage ratio at or above 1.50x. Lenders typically only advance 80% on A/R, 50% on inventory, and then get an equipment appraisal and advance based on the "orderly liquidation" value in that appraisal. Again, the deals do not have to be fully secured, but with deals of this size the departments you are going to be in at most Banks are not big on funding a lot of goodwill value. You can reach me at redacted or here if you haver any questions. Have a great day!
commentor profile
Reply by a lender
from University of Missouri in Denver, CO, USA
I know you said no interest in SBA, but based on Brad's comments which I tend to agree with, if you make a pivot towards SBA please reach out to me. Either way, good luck!
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