I am a self-funded searcher working alone and targeting SBA 7a financing in the $2.5MM - $4.5MM range. I am targeting 10% equity, or 5% equity with 5% sellers' contribution / secondary note. I want to get my finances together before speaking with lenders and would appreciate your advice.
1. Collateral: I have real estate investments held and operated in single-member LLCs. Income and taxes pass through to our (married filing jointly###-###-#### Being in Texas, I think our family home falls under homestead exemption. Would lenders see the RE LLCs as a risk-reduction, as the diversified cash flow would improve my ability to repay debt, or would they want to put the RE LLCs / properties as collateral? All properties except our house are fully owned / no existing liens.
2. School Debt: I have paid down most of my non-mortgage debt (MBA loans) but switched to prioritizing cash. Does cash on hand outweigh personal debt (under some debt-to-income ratio)? We have high credit scores, though I know that is less of a factor.
Thanks, everyone.
If there is deemed to be a collateral shortfall under the SBA guidelines on your acquisition, the SBA requires the lender to seek additional collateral from any guarantor sufficient to shore up that shortfall. If no such collateral exists, they will still do the loan. But if the collateral is available, the lender must take it. Most often this collateral ends up being equity in a home. However, since you live in Texas you are 100% correct, your home is protected under the Homestead laws, and a lender cannot take your home as collateral.
As it relates to your real estate investments, if they are solely owned by you and a spouse (whether held in an LLC or not), then the lender would require those assets to be pledged as additional collateral if there is 25% or more equity in them, at least until such point as they have reached the fully secured thresh hold on the loan. If you have any outside investors that own any portion of those properties outside of you and your spouse, then they cannot take them as additional collateral.
If they are available and pledged as additional collateral, due to the fact less of the loan is unsecured based on the SBA rules does entice a lender to make the loan. If you own these properties with other individuals, the fact you have equity and cash flow likely from other assets will be seen as a positive from the lenders even if not taken as collateral so long as they are not a drain on your personal cash flow in any way.
As it relates to personal debts, whatever personal debts you have will be factored into the personal cash flow. This can impact you because lenders will need to adjust the business cash flow for whatever draw them deem you need to take to cover personal living expenses, personal debts and income taxes. So the more personal debt service you have, the larger the adjustment they would need to make. However, just having personal debts in and of itself does not impact your ability to qualify for SBA financing. In fact the terms on most student loans are better than the terms on credit cards or even auto loans (due to the longer amortization on student loans) so if you were to accelerate paying down debt, I would pay down those items with the highest monthly payment first.
I hope this information helps. Again, happy to jump on a call to discuss further. Good luck.