Financial Upheaval and SBA Loans

March 16, 2023

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

Hello All,

I’m a self-funded searcher who has been looking for a business to buy while also holding down a job in financial services. I’m at a point where I’m considering whether to leave the job and search for a business full-time (I’ve been looking for about two years and would like to start searching more aggressively, maybe with some proprietary work in addition to the brokered, BizBuySell-type deals I’ve been looking at; I’m in the up-to-$4mm size range). My plan is to largely finance with an SBA 7a loan. The events of the past few days in the banking sector have me a bit concerned about availability of financing in the event that the financial system continues to show upheaval. I know recessions can bring great buying opportunities from an acquisition standpoint, but I’m worried about leaving my job if lending is about to get very tight.

I’d be interested in any thoughts on how SBA 7a loan availability was in the###-###-#### timeframe — were deals getting done? I know that that time was different and that there are reasons to be optimistic that it won’t get that bad this time, and I also know that the search fund model was in a much different place then. But any guidance on SBA 7a loan availability in general would be greatly appreciated as I consider whether to take this career step at this time. Thanks in advance for any thoughts.

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

2008 and 2009 was different then the issues facing the Banking industry today. Although some Banks have exposure to investments that have lost value due to quickly rising interest rates, in general banks are still very well capitalized and most can sustain losses related to those issues if they need too. In addition, the Federal Reserve has put some backstops in place to help support Bank liquidity, so overall I think the system is healthy.

SBA lending is a stable and a huge source of income for many Banks. I know several Banks that survived the Great Recession due to their ability to make SBA 7A loans and generate profits that rebuilt their balance sheet. SBA lending stayed strong during the Great Recession and I expect it to be strong going forward. In fact there are probably four times (just speculation - I have not done the actual math) more SBA lending shops today then there were before the Great Recession. Although capital is becoming a bit tighter and Banks are more cautious about the deals they do, in general deals are still going to get done.

Happy to discuss if you need more direct insight. You can reach me here or at redacted Don't get me wrong, I think there are some short term issues that will continue to plague the banking industry and economy as a whole over the next 12 to 24 months, but in general I think the banking system is on relatively solid footing and is in a much different position then it was in 2008 & 2009.

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

Historically the 7A program does pretty well during recessions, partly due to deals that would have been done conventionally in good times going 7A. The other thing to consider is that during the last two big recessions, the government used the SBA to juice the economy through 90% guarantees for the bank and waiving the fee for the borrowers. That isn't to say they will do that again but it is pretty easy stimulus to get done. I was in lending in 2008 and it was a train wreck for most of us. However, you are correct that there was opportunity###-###-#### was a different issue though related to mortgage backed securities, high bank leverage, and years of excess in housing. The issues this past week were related to bank runs which is different. This will likely be bank specific as opposed to systemic like 2008 was. Regarding SBA loans, the capital risk of loans done in###-###-#### that only worked on artificially low interest rates and barely working with addbacks needed will likely start to hit some SBA players. However, it should be specific to individual banks, at least at this time.

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