Rising Interest Rates

searcher profile

May 18, 2022

by a searcher from University of Pennsylvania - The Wharton School in Philadelphia, PA, USA

Is anyone being affected by the rising interest rates yet? 1. In terms of businesses you are searching for or, 2. In terms of what you are looking for in the specifics of the deal or the returns you anticipate for you and your investors or even, 3. the amount of loans you are willing to take out?

I am not looking for anything personal just how other searchers are going about their thinking for the foreseeable future. I still think investing in the right small business is one of the safest bets in a downturn.

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commentor profile
Reply by a lender
from University of Missouri in St. Louis, MO, USA
Matthew, this isn't apples to apples for SBA 7A loans but it is a good baseline for what you are thinking. The SBA 504 loan (mostly used for real estate and permanent equipment loans) bond market is driven by government backed bond sales. The chart below (apologies it doesn't input that cleanly) shows the rapid increase in the 504 loan rates over the past 5 months....almost 175 bps since January. This will impact the acquisition market as prime rates will start to get impacted as well. I was of the opinion this would be slow earlier this year re: acquisitions/multiples, , but a 2%+ interest rate increase makes a lot of deals look less attractive. If Prime goes up another###-###-#### bps this year, a lot of deals that were done in 2020 and 2021 will start to look a lot less attractive and borrowers who closed on those loans will be in a difficult situation if the deal was tight to begin with. For everyone on this forum, make sure you are working with a lender who is bringing these variables to you in the initial discussions. Don't just focus on someone who can get the deal done. Make sure you are working with someone who will give you critical feedback on what downside risks there are as well. If you close a $2.5 million floating rate deal and your rate jumps 2%, your loan payments went up $30,000 per year, A good lender in the second half of 2021 and into 2022 would have know this was likely so the credit approval should have reflected this reality.


###-###-#### Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 25 Year SBA 504 3.213 3.594 3.925 4.676 ###-###-#### Year SBA 504 3.067 3.449 3.761 4.615 ###-###-#### Year SBA 504 3.070 3.070 3.807 3.807 ###-###-#### Year Refi SBA 504 3.227 3.608 3.939 4.690 ###-###-#### Year Refi SBA 504 3.081 3.463 3.775 4.629 5.071
commentor profile
Reply by a searcher
from University of Florida in Miami, FL, USA
Rising rates seem to have pushed searchers to structure deals with greater proportions of seller financing as the cost of traditional and SBA debt has increased and leverage has decreased [i.e. you're able to find a seller to either 1) hold the debt cheaper, or 2) willing to entertain greater leverage than traditional sources are entertaining].
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