Rationale for going with an SBA loan

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January 14, 2020

by an investor from University of California, Berkeley - Haas School of Business in San Francisco Bay Area, CA, USA

Can someone explain the rationale for going with SBA financing if you have substantial assets like real estate, cash holdings or retirement savings?

From what I understand SBA requires an unlimited personal guarantee, so in the worst case scenario you could lose everything and start over from zero after going through bankruptcy.

Alternatively, one could go with other types of debt (e.g. from SBIC lenders, mezz, ABL, cash flow loans, etc) that do not require a personal guarantee. The interest rate difference is perhaps 2-4% depending on the type of loan. There are lots of lenders out there and a good debt broker should be able to get competitive rates for a quality business.

I can see how SBA financing make sense for someone who is fresh out of business school and has no assets. But otherwise the incremental risk does not seem to justify saving a couple of percent on the rate.

Interested how others think about SBA financing vs. going with higher cost debt given the personal risk tradeoff.

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Reply by a lender
from University of Missouri in St. Louis, MO, USA
second Michael's comments. I would state that you don't do an SBA loan by choice. It is usually the only option that exists unless you have full collateral coverage or you are willing to give up control of the business. The key term you used was "substantial" assets. If you have assets in an amount to cover the loan , you don't need the SBA. However if there is a collateral shortfall the SBA is usually the only option. Additionally, if you go the investor/SBIC/ Mezz, route, you will be giving up operational control of the business and/or have heavy covenant monitoring. Even with those options, you will likely need a sizeable down payment to get the loan done which would take your assets mostly out of the picture anyway. The SBA offers pretty good flexibility re: down payment, amortization and post close requirements.
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Reply by a lender
from Rutgers, The State University of New Jersey in Syracuse, NY, USA
A veteran SBA lender specializing in change of ownership deals with over 35 years SBA lending experience, 5 great reasons to go SBA 1. Relatively low equity injection sometimes as low as 10% which can include a portion of seller financing if available###-###-#### Long financing terms as long as 25 years if real estate is a majority asset, 10 years with no real estate, 3. Projection loans can be financed if accompanied by a solid business plan that supports cash flow coverage, 1:10 coverage rate otherwise. 4..No Balloon payments or calls with SBA###-###-#### Lenders are anxious to make deals happen. For more information reach out to redacted www.sbalender.com
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