SBA PRO TIPS FOR SEARCHERS....

Based on the post activity, it seems like there's a lot of interest in SBA loans across a number of the posts on here. I went through the SBA process in late 2016/early 2017 and closed on a loan to acquire The Wright Gardner in early 2017. I find myself regularly talking to other search entrepreneurs and imparting my advice on the process, and decided to write down some of my tips and biggest learnings from going through the process..

I'll caveat this post with the fact that there are people on this site who know way more than I do about SBA loans. I've done exactly one in my life, so if you are one of those people, please correct any false, misleading, or only partly true statements made here in the comments and I'll adjust the post!

First some pros/cons of using SBA loans


Pros

-10 year term is better than you'll get anywhere. Best I've heard of anyone doing on regular commercial term loan is 7Y.

-the interest rates are quite good for a business acquisition loan given the risks. Right now we're at 7.75% with a floating rate. I know someone who just closed a fixed rate at 6.95%. I heard of someone recently closing on a fixed rate in the low 5s..

-re-amortization amidst de-levering - if you have surplus cash and want to de-lever, you can throw a pile of cash at the loan and the lender will re-amortize it, which will cut your payments, freeing up cash flow for other purposes. That's nice financial optimization flexibility to have


Cons
-They tie up any real estate to your name - I had to pledge every real estate asset to my name as collateral securing the SBA loan. This creates some nausea and ongoing maintenance work like re-submitting proof of insurance every year

-You must personally guarantee the loan, and so will anyone else holding title on the collateral (in my case, my wife)

-Eliminates or complicates many structuring possibilities. For example, sellers must exit the equity completely. It's possible to structure around this on the back-end, but it's kind of cheating. The SBA rules require a full transfer of equity to the buyer and don't allow for the seller to retain an interest. This forecloses some potentially favorable structuring mechanisms such as earn outs and other equity retainer mechanisms for the seller. Also, SBA is particularly not friendly to joint acquirers or equity structures where more than one partner owns >15% interest. You can structure around that by creating an acquisition structure )ex. 85/15) that differs from your holding structure (ex. 50/50). Again, this is kind of cheating, but can be done when the equity partners really trust each other! 


Some Suggestions for Applying for and getting an SBA loan approved and funded

-Have a clean bank account to fund from (ideally with money sitting idle and no transactions for several months before close). This will eliminate or greatly reduce last minute underwriting drama

-Set a conservative timeline, then work to beat it by a lot, and you might close on time
-Get your real estate story figured out. The requirements around real estate are tough, even for businesses where location is mostly irrelevant. You want your leases priced at market rates, even if you are leasing back property from the current owner. If they're willing to offer below market rent on a property they own, you're probably better off reworking seller note terms (balance, term, interest rate) to create cash flow equivalence to vs. under-market rent

-If SBA is central to your financing strategy and you have real estate assets that will serve as collateral, it's probably in your best interest to open a HELOC account on any assets to get each asset to a combined LTV of 80 or 90% well in advance of starting the SBA process. It's close to a no regrets move. HELOC will have better rates and terms than SBA. The financial flexibility of HELOC is very helpful to have once you operate. I've heard of people getting 10y interest-only HELOCs at prime-200 that convert to a 30Y amortizing mortgage at term with a fixed margin above prime. The only downside to this strategy is that the SBA lender will assume full draw-down on any open HELOC, even if it's actually un-drawn because SBA is junior to the HELOC, The SBA underwriter will then assume a repayment schedule on that full draw-down as part of your personal underwriting ratio calculations. In short, it makes you look more indebted than you are and will increase the amount of income SBA will assume you need, which can stress the loan's coverage ratios, potentially reducing the amount of leverage you can put on your deal. But, of course, you can use the HELOC funds to play with the SBA loan amount.

-Get someone knowledgeable about SBA to review your application before it goes in (if possible) - they'll spot potential hangups


Reach out to me if you want to chat about a deal, financing strategy, self-funding, searching, operating, add-ons, or being a dad/parent search entrepreneur!

Happy searching!

Nick - [redacted]



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