Does interest rate adjust on SBA 7a Loan?

June 21, 2022

by a searcher from Franklin University in Richmond, VA, USA

I just spoke with a lender this morning who offered a loan that adjusts each quarter (Prime + 2%). I didn't know such a thing existed and assumed rates were fixed on a SBA 7a. Is this real? It sounded sketchy to me so I thought someone on here could set me straight. :)

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Reply by a lender
from University of Missouri in St. Louis, MO, USA

Seth, most banks sell their SBA guaranteed portion on the secondary market. There is a pretty lucrative market for this product. For instance, if your SBA loan is $ 2 million the bank can sell $1.5 million shortly after closing. The bank scrapes a fee of 9-15% (est.) depending on the market at the time and the spread over prime. If you fix the rate, the fee (if they can find a buyer) would go down into the low single digits. So, many banks don't offer fixed rates because they need the fee income v. the long term interest. Many business acquisitions are floating since the collateral shortfall means the risk is higher (even with the 75% loan loss protection), and there is risk in ownership transition. However, depending on the deal you can get fixed SBA 7A loans. You just have to talk to multiple banks. Recommend you talk to 3-5 banks so you know you are getting all the options available.

Reply by a lender
from Clemson University in Reston, VA, USA

Colin is correct however some bankers get creative. For instance, to mitigate the airball (portion of the loan that has no collateral), we typically will look for a cash flow recapture which can be defined as any number of ways. But simplest form is to take year 2 EBITDA minus year 1 EBITDA and the bank will take 10-50% of the cash flow and apply it the principle balance. The higher the percentage the higher the risk to the bank. I have only done one deal at 50% CFR typically we do 20-25% so that the loan gets into a collateralized position within 3 years. We do s ton of government contractor M&A deals outside the SBA bc the SBA is so intrusive, expensive and they require spousal guarantees and deeds of trust on homes. I have never taken a deed a trust for an acquisition. More than happy to discuss more over the phone###-###-#### is my office line. redacted

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