Conventional LOC with SBA 7a Loan

July 19, 2023

by a searcher from Indiana State University in Minneapolis, MN, USA

How easy/hard is it to get a conventional LOC with a bank post close of a SBA 7a financed business acquisition? LOC would be for inventory, business has been around for over 20 years, but it is an asset purchase, so newco.

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

Coming at it from the Commercial Loan Brokerage Shop perspective, I get this question a lot from searchers post closing who now need a line.. Even though the SBA does not typically rely on A/R and inventory for their collateral pool, the general UCC lenders file always covers all business assets. In order to get any other type of financing for inventory and A/R, you will need to get the SBA to release A/R and/or inventory from their collateral. Any reputable factoring company will not even purchase A/R if there is a legitimate priority lien in place. Most lenders will not approve more debt post closing, whether they are providing it or you require it from another lender. The only exceptions would be if your DSCR ratios fully support it and they do not need to rely on that collateral in any way.

I agree with others, I would negotiate your working capital needs up front. We have had some success negotiating acquisition loans where we know there could be a larger working capital need later, and getting the SBA 7A lender to not take A/R or inventory, or agree in advance to release it in the future if the need arises. But your best bet is to maximize the working capital you will need up front at time of closing. If you have additional questions you can reach me here or directly at redacted

Reply by a lender
from Bloomsburg University of Pennsylvania in Ambler, PA 19002, USA

Hey Josh- great question. Really not a simple answer here. Ideally you have the LOC structured as part of the initial debt stack, largely as it will be a more difficult ask after the fact in getting the SBA lender to subordinate on the assets (A/R, inventory, etc). If said lender needs to go in 2nd position or unsecured the amount of total leverage is likely reduced. Alternatively you would just need to allow more seasoning for the business to build up some cash flow (with you/your team as the operators) before a lender would be more ammendable to a LOC

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