Is it possible to get an SBA Loan without personal money down?
July 14, 2020
by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Salt Lake City, UT, USA
A friend of mine was asking me this, and I didn't know the right answer. He wants to do a self-funded search, and use debt (SBA + seller note) to retain most of the equity. But he doesn't have cash to put down. Can he get investors to cover the required amount for the down payment? Or will SBA not be an option without personal cash?
from The University of Auckland in Los Angeles, CA, USA
Banks are sometimes reluctant to tell you but to save you time - ultimately no credit committee will approve anything unless there is a US citizen/PR with US-based assets the bank can pursue in the event of default (someone to 'go after'). Traditional term = 'skin in the game'. Interestingly at mid-market this is often less of a requirement and PGs are not required (overall transaction strength supersedes borrower strength). But at SBA level the PG provider's personal financial position is king when the deal reaches committee. This appears to be even more essential since lockdown.
The reason offered for this is that in the event of default and SBA audit of the file it would be considered irresponsible lending if the loan were made without recourse to someone with commensurate assets. So it's required to protect the bank's reputation with SBA. Even if cash flow and DSCR are very strong and you over-collateralize the loan (more assets than debt), a personal guarantee from someone with substantial assets is still essential. So it's more about tradition and custom rather than bank's actual financial exposure; bank can have zero exposure and will still not lend without someone having significant 'skin in the game'.
Also assets shown on PFS must be proportional to loan size - i.e. $5M loan requires substantially more personal assets 'at risk' than $500K loan. As far as I can discern, a $5M loan requires that PG provider have at least $500K assets post-close. More conservative banks require more.
Some lenders allow you to use a home loan (HELOC) to provide the equity. And some will accept as low as 5% equity contribution with the other 5% from seller note. Many banks won't accommodate this; non-bank lenders more likely to be more flexible on borrower strength and equity requirements but your rate will be###-###-#### points higher than traditional banks. Check the early-repayment fees before considering refinance. Good luck!
from Boise State University in 800 W Main St, Boise, ID 83702, USA