Any SBA lenders open to growth plans to mitigate high concentration?

May 22, 2024

by a searcher from New York University - Leonard N. Stern School of Business in Grand Rapids, MI, USA

I have a deal with high customer concentration (80%) due to a major industry roll-up over the last few years. A small SBA lender told me that if I came back with a plan they could get behind, they would be willing to pitch it to their credit committee because the target does $1.5m SDE running as a lifestyle business.

I have since tried a smaller SBA lender and a large SBA lender with negative results.

I know this is not an ideal attribute for a target, but is it likely I can find an SBA lender who can get comfortable with this 20-year-old 16% CAGR business? If there are any I should connect with, please DM or comment below.

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Reply by a searcher
from University of Southern California in Mid-Atlantic, USA

Thanks ^redacted‌. ^redacted‌, I know you are looking for the SBA perspective on this but I thought I might add value from a fearful searcher perspective.

I was working very closely with a manufacturer last year, he even gave me access to his ERP so I could see the inner-workings of the business. This business also had high concentration, but he had great relationships with his customers.

Then he tells me his largest customer (maybe 30% of the business) had just migrated to a new ERP themselves and changed all of their parts numbers. The systems could no longer communicate and the customer could no longer place orders. The fix might take months. It was a real wake-up call regarding the perils of concentration - customer, supplier, etc..

I know the numbers look great on your prospect, but I would worry that it would be difficult to mitigate such an "act of God" or Black Swan event.

Reply by a lender
in Stuart, FL, USA

Hi Daniel, high concentration can be a problem for a lot of lenders, but there are ways to mitigate the deal. I've done numerous deals with 100% concentration and many more above 80%. It all has to do with the risk and how it's structured. One way to help mitigate the risk with the a large concentration customer is to make sure you have contracts in place. If there are no contracts in place look to put them in place. It's also important to show the lenders that you have other vendors that can pick up the ball and run with it should this vendor fall on its face. As you can see it's really all about how you structure the narrative and how you present it to the lender. If it makes sense a lender will do it. I would venture to say most people (non- lenders) on this board would be amazed at the type of deals you can get done with an SBA loan if it's structured correctly.

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