7(a) debt service mechanics with OC<>EPC structure

February 13, 2025

by a searcher in Denver, CO, USA

Hi all, this question is primarily for 7(a)-funded owners who acquired a business and real estate with EPC/OC structure.

I'm trying to make sense of the flow of funds between OC <> EPC <> Lender.

A lender wants to auto-debit debt service payment from a single account each month. If my rent payments (from OC to EPC) are substantially less than my total monthly debt service owed to the bank, I wouldnt have sufficient funds in my EPC to meet the debt service payment.

Similarly, if my OC is sending rent funds to the EPC each month, those funds aren't immediately available to be withdrawn from the OC account by the lender, if I were to point them to that account.

Can anyone describe their monthly flow? Do you ask the lender to split the debit amounts and pull from two accounts (one at the OC and one at the EPC)? Do you return the rent funds from the EPC back to the OC?

Many thanks in advance.

Reply by a searcher
in Denver, CO, USA

Fair market rent will only be ~20% of monthly debt service. Biz acquisition is 60% of loan, real estate is 40%.

Hypothetical: monthly debt service is 50K, but monthly rent is only ~10K.

Conceivably, I could just gross up my rent dramatically and send the full $50K to the EPC and have my bank debit from that account. But, in that case, rent is wildly overstated and my cash balance is predominantly at my EPC account instead of my OC account.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

It sounds like you will have loan funds being used for both the property purchase and the business purchase? You should talk with your accountant, but I am not sure you necessarily need to move the funds to the EPC. You could likely have the funds pulled from the OC and have the accountant make the adjustment for the money paid on behalf of the EPC when doing the taxes. I hope this makes sense. Good luck.

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