Banks with low downpayment

searcher profile

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

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commentor profile
Reply by a lender
from Clemson University in Reston, VA, USA
It comes down to the strength of the company and the multiplier. I have financed 100% several times when the company was under valued and the broker or investment banker didn’t understand the industry. Leverage under 3x and cash flow is strong is usually the key. I typically stay away from SBA financing because of the restrictions. There are a lot of banks that have flexible terms they just aren’t the big banks since their loan boxes are very defined.
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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great question. Since August of last year you can technically get away with zero down so long as you have a 10% seller note on full standby for at least two years. However, we have found few lenders willing to do zero down because they want the borrower to have some skin in the game. The only time we have seen zero down is if the buyer is a key employee buying out the seller or it is an add on acquisition in the same NACIS code as the company the buyer already owns. I always warn clients that zero down may not be available on their deal but we also push to get the most aggressive financing we can for our clients. In order for a lender to get comfortable with less money down they usually look at the following:

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.
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