SBA Limitations on Junior Debt

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by a searcher
in New York, NY, USA

1yr ago

SBA Limitations on Junior Debt

Let's say I do a deal with SBA debt, seller note, and pref equity.

If I later want to raise junior debt, are there any restrictions around this or parameters around rate or otherwise?

Are there typically any limitations on junior debt incurrence in the SBA, seller note, or pref equity docs? Any approvals required?

What if it's PIK debt so there are no cash outflows?

Realize it may differ case by case but wanted to know what's market.

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reply by a lender 1yr ago
in New York, NY, USA

Thanks for the tag ^redacted‌.

OP, you'll need permission from your senior lender to raise sub debt, whether at the time of the acquisition or later on. The senior lender will want to make sure there is enough cash flow such that their senior note is not at risk before approving this, and many lenders just will not.

There are alternative forms of mezz financing that may not require senior debt approval, but that's is a separate topic.

reply by a lender 1yr ago
in Ponte Vedra Beach, FL 32082, USA

As stated by a few previously most if not all SBA loans will have clauses stating they require prior approval by your lender and SBA to add additional debts. Many seller notes will include similar covenants restricting additional borrowing to protect the seller’s position. Preferred equity agreements tend to have verbiage and limitations on additional debts incurred post closing.