Commercial Loan vs. SBA Loan Terms & When SBA is Only Path

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April 14, 2023

by a searcher from Northwestern University - Kellogg School of Management in San Rafael, CA, USA

I’ve been operating under the premise that I would sign a PG to do an SBA 7a as a part of my self-funded search (min attributes include: $750k – 2m EBITDA, recurring revenues, consistent profitability, >15% margins, B2B service --> little collateral). I’m now trying to understand the conditions that determine when an SBA 7a is the only reasonable alternative, and what the tradeoffs are when I could a commercial loan or a 7a. My understanding is that conventional loans are thin for businesses below $3m in EBITDA and that conventional leverage can top out around 2.75x EBITDA###-###-#### % of purchase price) without mezz. This implies SBA vs. conventional is nearly binary based on deal size. I would love to hear feedback from any self funded searchers that went or attempted to go conventional. What did your capital structure look like? Deal size & company profile? Was your choice driven purely by desire to avoid the PG? How did this choice affect your search, acquisition, etc?

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commentor profile
Reply by an investor
from University of Pennsylvania in New York, NY, USA
As a self-funded searcher I would agree with your assessment that it is binary based on deal size. I think the SBA option "crowds-out" the conventional loan in this size range. Your target criteria will make it even harder; we purchased a company fitting your description exactly and lack of collateral was always a problem with conventional commercial lenders. It didn't matter how bullet-proof the business model was; if it didn't have assets on the balance sheet, it wasn't going to happen. In the end I went SBA and was very happy with it. The ability to get very high loan to enterprise value and the lack of financial covenants are great when pursuing a growth plan. Feel free to message me directly if you want to talk more.
commentor profile
Reply by a searcher
in United States
Currently going through this consideration now; also considering B2B service businesses where the only asset may be receivables, on which banks lend ~70% of value. I found that, after talking to a number of lenders, it's just much more difficult to make it happen, for a variety of reasons. They will be hesitant off the bat to do anything with a collateral shortfall. One bank I talked to indicated that if the DSCR was high (gave example of 3+) they might do it, but would still be signing at least a limited personal guarantee. Maybe there are banks out there that will be more lax on conventional stuff, but so far it seems fairly difficult to go this route and avoid the PG.
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