Feedback on SBA 7a commitment letter terms

November 16, 2024

by a searcher in Dallas, TX, USA

I'd appreciate some feedback on whether some terms included in a commitment letter for an SBA 7a loan are SBA-required or negotiable with the bank:

Deal overview: $7.5 million acquisition of a 20+ year old construction business that does $10 million revenue, $2.5 million EBITDA (3x purchase); 10% buyer equity (me, 100% owner), 20% seller note, remainder from SBA 7a loan.

SBA 7a commitment letter terms: P+225, lien on my home for 1.5x appraised value, 10-year life insurance policy on me for the amount of the loan, requirement to close my undrawn HELOC before closing.

Home lien: I have around $1 million equity in my home (after remaining 1st mortgage). I took out a HELOC a few weeks ago; however, the bank requires I close the undrawn HELOC so they have collateral. Is 1.5x appraised value the standard lien amount? If my house appraises for $2 million, that's $3 million lien.

Summary: $3 million lien on my house with $1 million immediate claim on equity, 75% guarantee on their loan from the $130k SBA guaranty fee I pay, life insurance policy for the full loan amount and the full term of the loan that I pay, unlimited personal guaranty on me (cash, other investments, 401k) and limited personal guaranty from my wife, 800+ credit score; for a 70% LTV business loan paying 10% interest.

Reply by a lender
from St. John's University in Ponte Vedra Beach, FL 32082, USA

While previous comment is not incorrect it is equally not correct,. The SBA SOP requires that the loan is either fully secured or all available collateral is taken. The requirement to close the undrawn HELOC is relatively standard to have available collateral to take. I am assuming the remainder of the loan is mostly unsecured after the collateral of your primary residence. The terms you've outline are standard and at surface level sounds like a strong loan structure for your request. You would be hard pressed to find softer terms elsewhere and spend significant time and effort in the hunt that may not be in your best interest. The life insurance is a standard requirement as well for largely unsecured SBA loans.

Reply by a lender
from University of Southern California in Los Angeles, CA, USA

I can get you a better deal. I can get you 8.75% fixed or prime + 0% if you are in the right state. Technically the SBA doesn’t require a lien on your home if you less than 25% equity in your home (the heloc subtracts your equity). If you’re interested in learning more, feel free to reach out for an introductory call here: https://cal.com/ishan-jetley-3d73m8/30min

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