Is raising equity and debt becoming more challenging? - Searchfunder

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by a searcher
in San Diego, CA, USA

3yrs ago

Is raising equity and debt becoming more challenging?

I heard an anecdote that increasing interest rates, inflation and the likelihood of entering in a recession is making it harder to finance an acquisition. Specifically, I heard that SBA lenders are seeking DSCR >2.0 and that it is getting harder to raise equity from investors.

Does this resonate with what you are seeing in the market?

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reply by a professional 3yrs ago
from University of Southern California in North Palm Beach, FL, USA

There is always money for what sources of financing deem to be excellent investments. And, a good ROI can be earned by everyone, no matter the interest rate.

reply by a lender 3yrs ago
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Great question. To put some perspective to my comments, we are a Commercial Loan Brokerage shop with over 350 funding partners and over 60 unique SBA funding partners, so I feel we have our fingers on the pulse of the industry. I have not yet heard of any SBA lenders requiring 2.0x DSCR to approve deals. However, I would be lying to you if I am not finding lenders taking a bit more conservative of an approach. I have not seen a full pull back from the majority of our lenders, but many are not stretching to do deals like they may have done just 3 or 6 months ago.

The key things I think lenders are very focused on right now (these are always important but even more important right now) are the following: 1) Relatively consistent and predictable business cash flow (excluding 2020 pandemic impacts); 2) buyers with industry relatable experience; 3) DSCR of at least a 1.25x even after stressing cash flow anticipating higher interest rates in the future; 4) sufficient post closing liquidity and working capital should an issue come up; 5) companies with stable revenues; and 6) usually some sort of seller carry to ensure the transition (not required in all cases but they prefer to see it in most).

Lender's are starting to stress deals for not only higher interest rates but what impact a business might have should there be a decline in revenues. We are still finding ways to get most deals done, but as a general rule we are seeing Banks preferring to see more equity, more seller carry, and lower multiples to get deals done. I am seeing multiples dropping, but I am not seeing many banks getting excited about funding deals at 5 or 6x multiples at the moment.

I am always more than happy to jump on the phone to discuss with anyone what I am seeing. I can be reached at redacted I hope this is of help.

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