SBA Limitations on Junior Debt
December 02, 2024
by a searcher in New York, NY, USA
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.
from Bentley College in Miami, FL, USA
For SBA loans, there are usually clauses around additional indebtedness. Most SBA lenders will require approval before you can take on junior debt because it could impact their collateral or repayment priority. Similarly, seller notes may include covenants restricting additional borrowing to protect the seller’s position. Preferred equity agreements might also have stipulations about how much leverage can be added post-transaction. I'm not saying that this language is always included but it's something look for in the financing docs.
in New York, NY, USA
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.