SMB Roll-Up, Debt Snowball Thought Question

Paul, I would be more than happy to get on a call to discuss financing options. I do not know how much of your SBA capacity you have used at this point, but at some point in the future you will run out of SBA capacity because you can only borrow $5 million on SBA loans. When that happens you could look at conventional financing, but conventional lenders typically require substantially more equity in a deal than SBA lenders do. So at some point you would need to pay down debt most likely, or have a larger chunk of cash to put down on future acquisitions.

The biggest issue with refinancing from an SBA 7A loan to a conventional loan is most conventional lenders are going to be a maximum term of 5 to 7 years. So you are going to look at much shorter amortizations. In addition, the DSCR requirements are typically much higher for conventional financing than SBA financing if the deal is not fully collateralized by hard assets. In fact many lenders will not do goodwill exposure at all unless the holding company has substantial cash flow or there is a strong guarantor.

Again, I would be more than happy to discuss long-term financing strategies. That might help you decide what to do going forward and is certainly something you should consider when planning. You can ping me here or directly at --@----.com Good luck.

It really depends on the nature of the business and the amount of leverage involved. Some debt in the capital structure can be prudent to maximize equity returns, but too much can be detrimental and cause you to have outsize risk to left tail risks in a downturn or unexpected operating environment. It can also leave you in a position where you are not able to be as nimble to pursue opportunities for growth and further acquisition. Since you are using SBA debt, I generally think paying part of it off (or refinancing into conventional commercial loans) is a good idea because it keeps your SBA powder dry vs your $5mm limit.