Feedback on anticipated path for underwriting - conventional loan vs SBA?

June 01, 2023

by a searcher in Cincinnati, OH, USA

I'm looking at an B2B opportunity and curious to get feedback on likely underwriting.

Revenue has been in the $5MM range for the past several years. Adjusted EBITDA was in the $300K range in 20-21, but dipped to (-$200k) in 22 due to COGS/supply chain issues. Owner projects the Adjusted EBITDA to be back in the $300K range this year, however TTM still needs more time to validate.

Balance sheet has minimal fixed assets. AR is close to $1MM and Inventory ranges about $1MM.

Based on the (lower) earnings size, minimal fixed assets for collateral, and normal underwriting discount applied to AR and Inventory, my suspicion is that Lender's would push this down the SBA 7a route. Would you agree or am I missing something?

I'd also welcome any comments on what type of multiple you would apply for valuation.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

It does sound like something that would likely get pushed the SBA route by most conventional banks. However, due to the weak cash flow in 2022, it would be hard to get done even via SBA financing. I am not sure what the projected price is for the business, but this might be an opportunity and asset based lender would do if the accounts receivable and inventory were solid and sufficient to support the price being paid. But you are likely looking at having to put more equity into an asset based deal to get a lender comfortable then the SBA would require. If you would like to discuss options, I am more than happy to do so. You can reach me here or directly at redacted

Reply by a searcher
from University of Maryland at College Park in Frederick, MD, USA

I would be cautious about this deal. A business requiring high capital and inventory but only yielding five percent margins! - Yikes. If the last full year is a negative income number I think it will be very difficult to secure any financing at all - even SBA. This may need to season a bit. I would approach a bank use their feedback and make them the bad guy when negotiating this deal to move it toward an annuity/earn out structure. Good hunting!

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