Equity raise to replace debt?
January 24, 2023
by a searcher from Duke University in Durham, NC, USA
I bought a company with SBA loans last year, but with interest rate changes, debt is costing 9%+. Been thinking about raising equity to de-risk and improve cash flow. Anyone dealing with similar issues and have thoughts on structure? I want to retain control, but am open otherwise.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
1) If you have a deal largely secured by goodwill, it is likely going to be a challenge to refinance that debt conventionally in the near term. Most conventional lenders want to be fully secured. If you have not paid down the debt enough to refinance, it is going to be a challenge to get qualified without collateral.
2) Most conventional lenders are going to do a 5 to 7 year maximum amortization, with goodwill deals usually pushed closed to 5 years whereas largely collateralized deals are closer to 7 years. Even though your interest rate may go down, refinancing to a lower amortization is likely to be more harmful on your cash flow than sticking with the higher interest rate on the SBA loan based on increased required principal payments.
3) You do not have to fully repay your SBA loan to bring the monthly payments down. If you make a large advance payment you can request your lender re-amortize the loan. Also, the loan usually automatically re-amortizes with any change in the interest rate based on the remaining term, new rate and loan balance. So if you only want to bring in some capital to pay down the debt to make it easier to cash flow going forward, you can do that. Just remember any change in ownership technically needs to be approved by the SBA and if a new owner takes a 20% or greater ownership interest, the SBA will require them to be added as an owner.
4) What goes up is likely to come back down in the future. Although I do not have a crystal ball, even the Federal Reserve is expecting interest rates to go back down later this year or in###-###-#### So you might benefit from waiting the interest rates out.
5) You need to be sure to weigh capital costs versus interest rates. Often time giving up equity or paying for outside capital can cost more, certainly in the long-run, then a short-term increase in the interest rate. So be sure to weight the overall cost of all options before reacting too quickly.
I know some Borrowers are in tough positions today. You may need to bring in some equity to get a payment to a more manageable point. But I just want everyone to know what they are facing up front before trying to make a change that could put them in a worse place in the long-run. Good luck.
in Boston, MA, USA
Business wise, debt is going to be cheaper for you in the long run. So keep the debt, chances are you're not going to find rates much cheaper than SBA with the LTV you've already got. Also if the business is doing poorly in comparison to when you purchased it which is why you're trying to get rid of some of the debt then your valuation is going to go down as well.
Personally - if you're not comfortable with the personally guarantee associated with debt and business now that your up and running and want to derisk yourself a bit to sleep better at night then its definitely worth it. Interested in going this route, I'd be interested to take a look - feel free to shoot me and email. redacted