SBA lending in an inflationary and rising rate (or fixed rate) environment

There have been a lot of discussions/questions I have been asked lately on the impact of the economy on SBA lending in acquisitions (search funds and non-search funds) re: interest rates and inflation. I thought I would make some comments to the general group as this has become a common topic.

These are just some personal opinions I have so don't take this as gospel:

1. Rising rates will start to make some SBA loans (both those in process and those already closed) difficult. Panels I have attended predict 3-8 interest rate hikes over the next 2 years (1 already happened last Fed meeting). on a $2.5 million loan that is about $310 per month, per hike. So if you take the middle (5 hikes) that is $1,555 per month for the same loan you have today.
2. Pushing this cost onto your customers might be difficult because, depending on your industry, you are already increasing costs on them due to inflation.
3. inflation and rising rates can be manageable if the economy continues to grow. However if we hit a snag or go into recession, this could be a problem. The remedies in the past 25+ years for this would be decreasing rates or increasing government spending. Neither of these is very helpful in an inflationary cycle.

What to do:

1. FIX YOUR RATE. SBA loans are typically floated because that is how banks make premium when they sell your loan on the secondary market. If you hear that "you cannot fix a 7A loan" that is inaccurate. That specific bank might not do that but fixed rate 7A loans are definitely allowed

2. Pay attentions to leverage. Borrowers and banks have become hyper aggressive over the past several years with 90% financing on deals that worked (sometimes barely) based on low interest rates. If you do work with a floating rate, make sure you are projecting higher rates in your analysis. Prior to Covid rates were in the 7's so it would be a wise decision to use that in your analysis, not the current, artificially low rates

3. Picking your bank. You should be speaking with at least 3-5 banks on your deal. If you only have one bank that thinks they can get that deal done, that would point to a possible issue (caveat if the lender is a specialized lender in a niche industry). The industry is still competitive so if multiple banks aren't wanting to do your deal you should be wary. One thing I would recommend in this situation: Don't just ask your lender to tell you about the deals they have done. Ask them to tell you about the deals they have closed that have gone bad. Telling you about the deals that went well is easy and will be all positive stories. So ask them, with as much deal as possible, when a deal went south what happened. Liquidation? BK? did they lose their home? why did it go bad? How much was your lender involved v. a workout person? Every lender has a deal go bad at some point so this will give you a feel for the risk you are taking on.

4. Be patient.. There was a post on this recently but at some point the rising rates and higher costs will start to push some buyers out. This will take a while most likely, but you will probably notice banks first. 90% deals will probably start to become more difficult as a deal that worked leveraged at 90% when rates were in the 5.5% range won't work as well at 6.5%, This will mean more equity if multiples remain the same. This will push some buyers out. Additionally, as some of the more aggressive/riskier SBA lenders start to take some hits, they will likely get more conservative. This COULD further take some buyers out of the mix. So it is possible that deals start to become more accessible to buyers with more cash v. just the one who puts our the highest LOI.

I will again say these are just my opinions, but since it was being asked from multiple parties I thought I would post to share my thoughts. Feel free to DM or email me if you have any questions/follow-up. Thanks