SBA loan assumption
April 19, 2023
by a searcher in Tulsa, OK, USA
Does anyone have any best practices or insights on the best way for a buyer to assume a seller's SBA loan?
When is it not possible? When is it possible?
Best way to approach the bank?
What is the timeline and typical steps?
Etc.
from Harvard University in Boston, MA, USA
If there isn't a due on sale / change of control provision, just structure it as a stock sale (this will have significant legal and tax consequences). You could set it up as a subsidiary then dissolve the subsidiary into the parent corp once the loan is repaid. I think this is called a forward triangular merger.
If there is a due on sale / change of control provision, then you've got to decide how much you want this debt in place and if it is worth having the subsidiary be in technical default. Technical default can make it quite cumbersome to get additional debt, but if you're only in technical default banks are usually begrudgingly happy to keep cashing the checks. There's a very big difference between technical default and economic default. But if there is other debt there's probably a cross default provision so be ready for adversarial debt relationships until it is all paid off.
Creative options exist, like Buying 49% of the shares outright and getting management incentive options to get another 50% and options to buy the remaining 1% at the end of the loan term. But I don't know the specifics of the deal, I'm not a lawyer, and I'm definitely not your lawyer.
from The University of Chicago in Chicago, IL, USA
2) To my knowledge, most, if not all, business acquisition loans have change of control provision.
3) Assume the SBA loan is assumable and is in senior position. If the business buyer is planning to get additional loan, then the second lender will have to be junior to the senior loan. This is unlikely unless you get someone, typically a non-bank lender, who will demand very high interest cost, and very likely they will not have unilateral rights to call default Such high interest cost may defeat the economic rationale for assuming the existing low-interest SBA loan. (I am assuming that is the reason for the question).