Banks with low downpayment
May 03, 2024
by a searcher from George Mason University in Manassas, VA, USA
So on my deal at $3.4M via SBA 7(a) I have a 10% sellers note and the bank approved me to just put 2.5% in.
i see so many brokers saying “you need at least 10%”, and tons of buyers mentioning 10-20%
im curious why more banks aren’t offering the 2.5% to draw in more business? Its been allowed for over a year
from Clemson University in Reston, VA, USA
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
1) What is the transaction risk? Does the buyer have industry experience and is there going to be much risk in the transition. Strong industry experience is usually important for most lenders to get comfortable with less money down.
2) Is the DSCR supported with less money down? If the DSCR is tight with a limited down payment, then the lender might not be as comfortable and may want the larger down payment.
3) How much exposure is there to goodwill on the transaction, or does the deal have some strong hard collateral like equipment or real estate? The Bank has less of a loss exposure when there is hard collateral.
As someone already mentioned, the Bank has a 75% guarantee on the loan from the SBA but still has exposure to 25% of the loan amount. The Bank shares in whatever collateral exists on the SBA loan based on the percentage of the loan they have. If the loan is backed all by goodwill value, the Bank is at risk of a loss on the 25% of the loan they have in a default and liquidation scenario. Depending on the size of the loan that could be a huge risk for the Bank from a capital perspective. Remember, Banks look to loose nothing on loans as a general rule and typically never go into a conventional loan situation with a potential loss from a collateral perspective. So being in a position where a loan is not fully backed by hard collateral is really only common for Banks in the SBA world or in the investment banking side.
Lastly, there is substantial data from over the years showing that Banks have taken significantly higher losses on transactions where there is no borrower equity in the deal. Borrowers are much more likely to walk away from deals where they have invested a limited or zero capital into them. So often times Bank management wants to see some sort of investment.
As demand continues and more lenders start to offer less money down, you will probably see more SBA lenders offer it. In fact we have done plenty of deals already at 2.5% to 5% down, but we always warn customers to be prepared to put more money down as doing less down isn't a given and is contingent on the deal they have. Also, be cautious with your term sheets. We have heard or lenders providing terms with the less money down but the loans getting approved with more money down. Happy to talk through this with anyone that is interested at any time at redacted Good luck.