How are people thinking about SBA loans in current high interest rate environment?
November 21, 2023
by a searcher from Stanford University - Graduate School of Business in New York, NY, USA
My view is they nowhere near as attractive as they were a couple of years ago. Low to mid-teens interest rates is a high hurdle. At that point I think it makes more sense to have more equity (if you can raise it) as the cost of capital between the two is theoretically very tight.
If your potential equity source is demanding a preferred return rate below an SBA loan, why take the SBA loan?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
1) High loan to cost. The standard required down payment for most business acquisition loans is 10%. In some cases with deferred seller notes you can get away with even less down. This makes the equity gap pretty slim that you need to fill, which often means you do not need to raise as much outside capital or give away as much of the business.
2) Guaranteed 10 year loan term for business only transactions. Most conventional lenders are closer to the 5 to 7 year loan term. So you are going to get a longer amortization which helps to offset some of the debt costs.
3) Easier to get the loan done. Because a lender has a 75% government guarantee, they are move enticed to make the loan.
4) No financial covenants, meaning you do not have to hit a minimum debt service coverage, minimum net worth coverage, or other covenants post closing. So long as you are making your payments and do not have any material change in ownership, there really is no way for the lender to call the loan.
Although interest rates are much higher today with SBA 7A loans, the interest rates are variable. If you can make a deal work at today's interest rates and the Prime rate does come back down in the future, it should improve your cash flow in the future. Lastly, you need to weigh the long-term loss of equity you have to give up by having to raise more capital. It is not only the cost of that equity if you are providing a preferred return, but the fact you now own less of the operating company and will forever earn less of the profits or proceeds from a future sale of the company. It can be hard to put a number on that potential loss, but it is something to consider.
My recommendation to clients considering more equity is to build a spreadsheet and analyze the deal at various interest rates with the SBA debt and ultimate returns as well as value what potential returns you would have with a lower ownership interest and more equity. You may find you would want to do a blend and raise slightly more equity to bring the debt down. Again, SBA financing is not for everyone, but a lot of our clients like the fact they can limit their cash down and can keep more ownership and control over the business because they need less outside investor capital. Happy to discuss your situation further at redacted Good luck.
from University of Maryland in 4040 Civic Center Dr, San Rafael, CA 94903, USA