Seller Note Impact on DSCR for SBA loan
November 27, 2024
by a searcher in New York, NY, USA
When calculating if an SBA deal meets the 1.25x DSCR requirement, how do you account for a seller note?
• How does it work if the principal is due as a bullet payment at maturity, but there’s cash interest in the interim?
• What if the interest is PIK (paid-in-kind) and the principal is a bullet payment?
• How do you handle a structure with 2 years of no payments (interest and/or amortization), followed by 3 years of amortization and/or cash interest?
Also what are the most common scenarios?
Thank you!
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
First, if your have the loan on standby for an extended period of time and the payment is due at maturity, both principal and interest, the SBA lender will not include anything in debt service.
If the loan is interest only during the term, they will count the required interest payments in debt service.
I am not exactly sure what you mean by the interest being "PIK". If it is accruing and not payable until later, then they will not count it in debt service. You cannot pay for it any other way and have it qualify for the SBA rules unless I am misunderstanding what you mean.
If you have the loan on standby for a couple of years and then it goes into repayment, it really depends on the lender. If it is on standby for at least two years, many lenders still look at the payment that will be in place at the end of two years and factor it into the DSCR. Some lenders will not include a deferred payment not so long as the payments are on standby for two years or more in the DSCR. The longer you have it on standby the better the chance the lender will not include it.
The biggest thing to keep in mind, most lenders require hitting their minimum DSCR (which for most lenders is in the range of 1.25x to 1.35x) based on all debt service. So the seller note does get calculated into the transaction.
If you would like to discuss your specific situation further and go over potential options (such as using balloon payments) I would be happy to do so. You can reach me here or directly at redacted Good luck.
from Warwick Business School in Wappingers Falls, NY 12590, USA
Having said all this, if you are struggling to get to a good DSCR it may be worthwhile to rethink the price and even the deal. Real cashflows, post acquisition, almost always go down in year 1 and likely in year 2. Seller normally retains all cash and A/R, You will start with a working capital loan in addition to the acquisition. You will likely be depleted in cash from the downpayment and closing costs. It will take you a few months to learn the operations and specific nuances of the company - things like customer, vendor relationships, employee dynamics. It does not matter how confident and experienced you are in the industry. Definitely factor in macro trends, possible industry regulations, threats from entrants, consolidations happening around the company etc. If I cannot get to a 1.5x minimum there should be a really good reason why I want to buy a company, especially providing personal guarantees and liens on my assets! Just because a lender is willing to lend does not make it a good purchase because the onus of DD is mostly on you as a buyer.
Sorry I am sure you know all this but mentioned it none-the-less. Good luck on the deal.
Best - Roni