In several presentations I have give in the past couple of months, focus from prospective borrowers has been on how to choose an SBA lender. There is no one size fits all answer, but here are some tips that I think are helpful in choosing which lender or broker to work with. You have many options in this space, so picking a lender/broker that is right for you and your opportunity is paramount:

1. Don’t ask us about the deals we have closed. Any lender/broker can make themselves look like a hero at the closing table. Ask your lender/broker to tell you about loans that struggled, and yes, even defaulted, after closing. This has a two pronged benefit: a) you find out if they interact with their customers post close. Most lenders and brokers are compensated on the close and have very little interaction with the customer post close. By telling you less about the deals they have closed, and more about the interactions after (even tough ones), you can get a gauge on how your lender will interact after the closing table. Detailing how/why these borrowers struggled can help you in your LOI to closing process. b) this can also be a character barometer. Every lender has deals that go sideways or struggle. This could be a minor cash flow issue, or a catastrophic default. Either way, press your lender to tell you about the downside and not just the positives.
2. Working capital- rarely does a deal struggle post close because you overpaid on the multiple (caveat is if you were too aggressive on addbacks). If you paid 4.25x instead of 3.75x, you will likely kick yourself but will be fine in the long run since it is a 10 year loan. On the other hand, working capital can cripple your business within weeks/months of your close. This, in my opinion, in the #1 mistake made in acquisitions. The current owner has likely had a###-###-#### year run of success (Covid dependent). You are likely buying a cash heavy, debt light/free business and replacing it with a debt heavy, cash free/light business. In short, they can afford to be inefficient due to a strong balance sheet and you cannot. Every SBA loan will wreck the balance sheet at close. Just using the current working capital as your need could possibly be the right amount but is the wrong approach to define your WC need. Do your homework in the bank statements. Cash in/cash out in the first###-###-#### days is vital. You cannot accrue payroll no matter what your DSCR looks like. Your lender should be a partner advising you on the working capital analysis.
3. Don’t let your bank gloss over the issues. We should not be your cheerleader. In every acquisition, the buyer, seller and, if relevant, broker are all itching to close the deal. The bank should be the one asking constructive questions. Things like customer concentration, aggressive addbacks, lack of industry experience, and capital expenditures should not be dismissed by your bank. Your job as the buyer is to mitigate these issues, not the bank. I am supposed to challenge you and take the approach of what can happen, will happen. If you have a 40% customer concentration, even one what has been a 20 year customer, your bank should underwrite as if that customer exits the day after the loan closes. In the end the bank will likely be fine, YOU ARE THE ONE WITH A 10+ YEAR PERSONAL GUARANTEE

4. Your SBA lender likely has little to no sway in what happens after you close. This relates to my first point, but almost every SBA 7A lender is a transaction lender. There is nothing wrong with this and it is the general setup of the SBA 7A program for most banks. But once the loan is closed amending it is nearly impossible. There is no changing things so it has to be done correctly at the time of closing. If your lender is not telling you that working capital is almost impossible post close (a call I field regularly from loans I didn’t close) then they are doing you a disservice. The SBA does a lot of things well, but adjustments post close is not one of them and your bank should be advising you of items like this.

5. Capital expenditures- this is the hardest item to prescreen. Almost every deal I see adds back full depreciation in their analysis. However, this is a 10 year loan and you are likely going to need to replace most of the equipment in that time. CAPEX addbacks should account for this, even though it rarely is mentioned in most bank’s analysis. Don’t dismiss CAPEX if it is a part of the business.

6. Addbacks. Outside of EBITDA and owner’s comp, addbacks rarely materialize in the business. Most are personal (i.e. auto, phone, insurance, etc.) that you will take as well. So while these may help you personally, most addbacks rarely materialize on the company P&L. Addbacks are a good way to push seller notes, especially contingent seller notes. But, don’t be surprised if they don’t help your DSCR.

These are just a small number of tips, but hopefully will give you some thoughts on how you choose the lender or broker you work with. Every lender on this forum can close a loan. Otherwise, they would not be here. But the point in a 10 year loan is not to just close the loan but closing it in a way that allows you to prosper for the full 10 years of the loan. You can find many commentaries on this forum pointing to the success of “the close.” What you rarely, if ever, hear about is the failures and why they failed. This is not something people boast about but is a potential outcome in any SBA loan. If your bank does not address this outcome and