SBA Loans & Hold Backs

by a searcher from Cornell University

3 years ago

Has anyone successfully structured an SBA deal that held back payment through escrow until certain revenue targets were hit? I’m attempting to receive the full loan amount from SBA but disburse portions of it only after certain revenue thresholds have been met, and want to find a precedent that I can copy or learn from.

PS — I’ve already heard plenty of times that this isn’t possible, but I don’t buy that. Rather than commenting “it’s not possible,” I’d like to hear about creative examples where it’s been done.

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5 comments

lender from The University of Chicago - Booth School of Business

Spot on. As long as the escrow backstops agreed post closing obligations and adjustments (and not earnouts or other seller upside), it is permissible. A downward purchase price adjustment is usually dealt with via a reduceable/forgivable seller note measured against a historic threshold of revenues or earnings but, subject to the bank's concurrence, there is nothing to prevent it from being addressed via an escrow reserve. The difference is that the release of a purchase price escrow reserve would go to the lender as a prepayment rather than as a reduction of a seller note.

3 years ago | like reply | 2 likes

intermediary from Indiana University at Bloomington

Lisa is correct as I helped a client last year do exactly that with Live Oak. Other banks may not (usually) understand the rules. If the escrow is not paid to seller, then the amount goes back to the bank, you don't get to keep it. We have used erosion clauses on most deals due to Covid, either bumps or dips. You can also use Seller Notes for the same purpose, allows for a longer lookback, but usually they have a shorter amort so possibly more cash out of pocket annually after the first year (but usually the first year is when you need more cash, so a seller note is better). Seller gets is all in 12 months with an escrow, might be able to do it longer with the bank vs. getting it over time with a Seller Note.

3 years ago | like reply | 2 likes

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