HELOC as SBA Down Payment??

May 24, 2022

by a searcher from Purdue University in Prosper, TX, USA

Hello, SF community.

With home prices increasing like they have, I've amassed a pretty good amount of equity in my home, like I'm sure we all have. I'm curious if anyone has ever used a HELOC as the downpayment for a SBA loan. I currently don't have any additional income as I am pursuing a "self-funded" search full time. Prior to quitting the day job, I lined up a $200k LOC I haven't drawn on yet. I have some other cash savings for living expenses around $80k. Retirement is about $150k in IRA's. I have no other personal debt, except the main mortgage and a car payment.

So again, the question is, do you think anyone will lend on this situation? Let's assume the acquisition target has healthy cashflow and can safely cover the debt, included my personal LOC payment. Let's also assume the purchase price of the business is ~$1.5M at $500k EBITDA (I know 3x multiple is wishful thinking). So, I'd put the ~$150k of the LOC towards 10% down, and then perhaps let's say I get the seller to take 5-10% financing on top of that. I've heard this might not work because of stacking debt, but still curious to hear feedback.

I'd love to avoid any criticism on my personal situation financially or comments directed at whether this is a good idea or not. That's not what I'm asking. What I'm asking is if anyone has experience to say if I could get SBA funded given these circumstances. If I missed any info that would be needed to advise on this situation, please let me know.

Thanks!

Reply by a searcher
from North Carolina State University in Sykesville, MD 21784, USA

My suggestion, is to sell your house, and rent. Then use the equity to buy a business. This will give you the added benefit of being able to look further geographically, and you just might find a good business at the 3x multiple. I am on a similar path and sold my house in September, and I am using some of that equity along with my retirement in a 401K ROBS structure to buy a business. I have been writing up the process. Here is a good starting place where I talk about the money:: https://jordannovgrod.substack.com/p/wheres-the-money-coming-from?s=w

Reply by a searcher
from Texas A&M University in Elizabethton, TN, USA

Ask your lender about how long you will need to prove the funds exist in the account (2 months etc). You may find that in the time it takes to close, you end up carrying HELOC longer than expected pre close.

I did a cash out refi instead. This should be better for DSCR than most HELOC and better rate (well used to be anyway...).

Then I sold my house when business acquired was not in original search city. This was also good, as best cash out refi was still 20% down. Now new house purchase, plenty of 5% down options, so this frees up the most as mentioned by others above.

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