Inquiry on SBA loan repayment rules on a subsequent acquisition

searcher profile

March 19, 2024

by a searcher from University of Pennsylvania - The Wharton School in Toronto, ON, Canada

All,


I am involved with a situation of a small company acquiring a bigger company. I am prospectively providing equity to support the overall transaction. The small company has an existing SBA Loan at present, however the combined transaction will involve a new lender providing the acquisition capital for the purchase of the bigger company and some refinancing of existing debt at the small company.

Does the SBA require that their existing loan be extinguished in this scenario? Or is there a scenario where the SBA loan would exist with the small company post new acquisition and refinancing?

Any insights here would be appreciated; and thanks in advance.

Regards,

David

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commentor profile
Reply by a lender
in United States
Depending on which company will be the surviving company will determine the answer ^redacted‌. If the smaller company took out an SBA EIDL loan and is still in repayment, the SBA EIDL loan is directly linked to the founding business that took the loan. If that business is sold, typically, the EIDL loan needs to be paid off or settled before the business sale is finalized. This is because the loan is tied to the specific business entity and its assets, not the owner per se. I ran into this scenario a few times over the years. The banks required the original owner to pay off the SBA EIDL loan out of his cash liquidity before the sale of the business loan closed. A must to discuss logistics in such a way before loan closing.
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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
^redacted‌ Thank you for looping me in. I agree with what has already been said. The existing debt can stay in place so long as the existing company is doing the acquisition. However, the change in ownership does play into things a bit. This is somewhat of a complex question. I would be happy to jump on a call to talk through it and be sure I understand all of the nuances of what you are looking to do so I can provide the most accurate advice. You can reach me here or directly at redacted ‌‌
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