Projected SBA Rates and Impacts Assuming Upcoming Cuts

searcher profile

September 03, 2024

by a searcher from University of Florida in Virginia, USA

Hi all,

Wondering what SBA rates will adjust to once the Fed cuts rates, assuming they cut either 0.25% or 0.5%

How do you calculate this? When would they adjust? How do we expect this to influence M&A activity and multiples? Any other impacts?

Thanks!

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commentor profile
Reply by a searcher
in Miami, FL, USA
SBA rates are tied to the prime rate, which follows the Fed’s rate cuts. If the Fed reduces rates by 0.25% or 0.5%, SBA rates should adjust accordingly, usually within a few days or weeks, depending on loan terms. Of course, each lender may have a different approach and rate premium they will add to the prime rate. You'll have to get term sheets and speak with lenders to know their specific approaches and typical premiums. Lower rates generally boost M&A activity by making debt financing cheaper. In theory, this should increase deal demand and multiples. However, economic conditions (and this year's political considerations) could influence how much this benefits the market amongst other things. It's important to know, but I agreed with Mihir that this shouldn't be breaking your deal; otherwise, you need to build in some more significant margins of safety in your structuring.
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Reply by a lender
from North Carolina State University in Raleigh, NC, USA
Most preferred SBA lenders operate with a variable rate that adjusts quarterly, based on the WSJ prime rate. There's a margin added to this rate, so if the Fed cuts rates by .25% or .50%, the WSJ rate would typically adjust by the same amount. It will slightly reduce your annual debt service, making it marginally easier for deals to cash flow and meet the DSCR ratio. However, if that small difference is what makes or breaks your deal, you like have bigger concerns to address
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