Bank covenant on seller note

searcher profile

July 30, 2024

by a searcher from The University of Chicago - Booth School of Business in Minneapolis, MN, USA

My deal includes both a 7A loan and a seller note. The bank is asking that payments on the Seller note be subject to maintaining a DSCR of###-###-#### effectively a "partial standby note" (I understand that partial standby typically means a 2 year standby period. My bank is suggesting a rolling standby where payments can be made at the end of each year if DSCR for that year is 1.25 post any payments made.)

1. How common is this type of partial standby agreement?

2. Any suggestions or experience re how to structure seller note payments while complying with such a covenant? (Is there any better option than simply having seller note payments on standby until DSCR is proven with the bank?)

1
22
165
Replies
22
commentor profile
Reply by a professional
from University of Virginia in Holmes, NY 12531, USA
Luke, thanks for the tag. Think all of the comments above are high quality. In my own experience, I’ve seen the concept you note here and there, albeit infrequently (I assume that the amount of the SBA Loan has been computed with a certain DSCR ratio, ordinarily you’d see monthly payments on the seller note baked in, i.e. subtracted from FCF, which is then scaled down by the DSCR factor). Without seeing the papers - I may be misinterpreting - it reads a little like the bank’s wanting a double dip (and agree with the above, suggests bank thinks DSCR generally is too tight).

In any event, as to structuring, you’re likely to find a more receptive audience negotiating with the seller than you are with the bank. Please feel free to DM if I can be helpful at all.

Best, Matt
commentor profile
Reply by a lender
from California State University, Sacramento in Seattle, WA, USA
The dsc covenant in the seller note subordination is very standard for SBA lending. It’s there as a backstop in case something happens post close and you need the seller’s attention. It’s not the same thing as a partial standby note. The metric is there to force a conversation should you need it in the case of broken glass. Lenders have different DSC hurdles and if you’re starting DSC is at or above the subordination hurdle (which is should be) then there shouldn’t be any concerns. If you read the basic SBA subordination, it’s actually way more open ended than that. Your sba lender is putting a metric on it and that’s prudent lending. And protects the buyer. Happy to chat through our philosophy directly. redacted
commentor profile
+20 more replies.
Join the discussion