View on SBA 7a rates as rates rise ? How high is too high ?
August 15, 2022
by a searcher from Columbia University - Columbia Business School in New York, NY, USA
Internally our view at Obsidian these days is that to be conservative - we are modeling out SBA Loans for potential acquisitions in the 9.5%-10% range. To put this in context pricing on our 2020 acquisition financing was in the high 6s. Any thoughts from the community as to whether we are in the right ball park or if we are being way too pessimistic re the cost of 7a Capital?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
First, if you are getting a variable rate loan like most of the market for 7A loans, lenders are stressing that interest rate during underwriting, typically by 1 to 2%. So you will want to be sure your cash flow still works at higher interest rates. In general I am underwriting all deals right now at between 8.50% and 9.50% depending on strength. If I can get them qualified there I have not had any issues getting them qualified with the Banks.
Secondly, because lenders identify how high interest rates have gone up and are likely to go, many have cut back on the spread they are using. Whereas they were consistently using an interest rate spread of 2.25% to 2.75% above Prime at the beginning of the year, I am now seeing lenders drop that down to 1.50% to 2.25% over to try and make up for some of the increase in interest rates.
Third, some lenders are offering a fixed rate. However, they are typically offering the fixed rate at a higher measure over Prime versus the variable rate. The risk here is that if we do enter into a recession and inflation dies down, interest rates could come down as quickly as they have gone up, which would mean the interest rate on your loan will not move down if you took the fixed rate option. Often times it can be hard to refinance an SBA 7A loan, especially if largely secured by goodwill, into a new product in the future, which means you might be stuck with that higher fixed rate for an extended period of time.
Lastly, I always tell my clients you need to look at the interest rate on the loan versus the cost of capital. Although that interest rate might be quite a bit higher today, what would bringing more equity or investors into the deal cost you in the long run? Often times the higher interest rate provides a better return long-term versus giving up additional equity or bringing more investor capital in. I am more than happy to discuss in more detail with anyone at redacted
from Rutgers in Philadelphia, PA, USA