Repay SBA loan fully before dividends?

searcher profile

January 20, 2023

by a searcher from University of Michigan - Ann Arbor in New York, NY, USA

Hey all,

I've read the HBR guide on searching. The section about SBA repayment left me unresolved on SBA repayment. I understand there are benefits to fully paying off senior debt quickly in order to limit interest expenses. With that said, is it a requirement or universal standard to do so for SBA loans?

I want to understand if a business is meeting it's monthly payments, can it begin to make payments to subordinate lenders and equity holders while the loan balance remains outstanding to the SBA.

Thanks!

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commentor profile
Reply by a searcher
from INSEAD in Osaka, Japan
Hi anonymous,

Just sharing here my experience working for an investment bank outside US - so please take the following with a pinch of salt as I’m not an expert of US businesses.

First things first, refer to your loan documentation - it should be stated whether or not you are allowed to make distributions during loan life (and if yes, what the conditions are etc…)


Usually companies are allowed to make distributions (at least that’s what I observed) subject to meeting certain conditions (compliant debt ratios, enough liquidity in the business etc…) - once again those conditions should be written in the loan documentation.

Anyway, to answer your question, I would be surprised to hear that your bank traps cash into your business until full repayment so you should be ok to make distributions during loan life (or worst case you would “just” need approval from your bank).

But there are people here much more competent than me with SBA loans than me so please prioritise their opinions.
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Reply by a lender
from California State University, Sacramento in Seattle, WA, USA
The SBA documents do not speak to distributions. Assuming you’re paying your sba loan as agreed and managing your business acceptably, then you shouldn’t be prohibited in making distro. But check with your bank to make sure how they feel about it.

If these payments to investors or sub debt are stated as required in your operating agreement vs unspecified discretionary distro down the road, then your sba lender will likely have to consider those payments as debt in the cash flow analysis.

As long as you meet your 10% minimum injection requirements, then any SELLER NOTE debt can be paid subject to adequate dsc.

Your question is very involved and there’s more to discuss. Happy to discuss 1 : 1 to get all the details.

Also attend weekly office hours where Heather Endresen and I get into these type of details. DM for links to register.
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