Advanced SBA Loan Questions
January 23, 2024
by a searcher in New York, NY, USA
Several SBA loan questions below. If someone might be able to answer, I'd be very grateful.
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1) If I use let's say $4mm of SBA debt to fund my acquisition, how long / burdensome is the process to get funded an additional $1mm SBA loan tranche to do a tuck-in acquisition?
2) If I max out SBA debt on the initial acquisition at $5 million, if I want to do tuck=in acquisitions, then: 2a) Do I need to refi out the SBA debt with a larger conventional loan or can I just take on unlimited incremental conventional debt behind the SBA loan? Are there any constraints I should be aware of? 2b) What is the typical rate on what I assume is a second lien conventional loan behind the SBA loan? 2c) Can you raise the conventional loan from lenders other than your SBA lender for this? 2d) Are there any SBA lenders that are particularly well suited for this situation (one stop shop as you scale)? 2e) If I'm doing a tuck-in a few weeks after the initial acquisition, I assume the minimum equity requirement only applies to the first acquisition correct? The tuck-in can be 100% debt financed even if it closes just a few weeks later?
3) In practice, assuming you have a sufficient DSCR and are buying cheaply enough, are most SBA lenders OK with 5% down by combining sellers note and SBA loan, or is this only technically possible but not typically something SBA lenders would underwrite?-
4) When you use a lending brokerage like Viso, do the fees they charge the lender get passed through to the customer economically through let's say higher fees? Or is it genuinely no cost to the searcher?
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5) What are typical financing fees all in for an SBA loan? I have heard of people with pretty sizable fees at close but the guaranty fee seems small from my research. What other fees exist and how much?
6) If I have a seller note that PIKs at 7%, does the non-cash PIK interest get included in DSCR or is it strictly cash interest that is incorporated?
7) I understand that the amort schedule for SBA loans is such that you should have equal payments over the life of the loan if the interest rate were flat (vs TLBs that just take 1% amort off the initial balance), with more principal in the early periods and less principal later. When the variable rate flexes up and down, does the principal payment schedule stay flat while the interest fluctuates, or does the amortization schedule get reset? If you do an add-on to your existing SBA loan, I assume you create an amort schedule for that tranche that aligns to the initial loan's maturity?8) I understand in many cases, EBITDA declines in the first year as the operator is getting a handle on the business and may need to invest in G&A, and they're often able to grow back within a year or two. In the event of an EBITDA decline like this, how difficult is it to still execute on a tuck-in acquisition strategy and secure an incremental loan during this period, assuming PF DSCR will still be###-###-#### 5x, particularly where the tuck-in is actually boosting PF DSCR vs without the tuck-in?
9) Do the low default/bankruptcy rates cited by many exclude or include Offer in Compromise situations?
10) Are there any covenants in the credit agreement that limit your ability to raise management salaries?
11) Is 45% a market tax rate assumption for allowable tax distributions?
13) What are typical friction costs from refinancing SBA debt with conventional?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
2b) What is the typical rate on what I assume is a second lien conventional loan behind the SBA loan? Lenders really do not do second loans behind the SBA debt. Traditional lenders want to be first on the debt.
2c) Can you raise the conventional loan from lenders other than your SBA lender for this? - You could potentially keep the companies and use conventional financing for the second company without taking out the SBA debt.
2d) Are there any SBA lenders that are particularly well suited for this situation (one stop shop as you scale)? - Most SBA lenders are not going to go above SBA limits unless they do so on a Pari Passu basis, and Pari Passu is not easy to get done. Once you exceed and want conventional financing most SBA Banks will not want to refinance their own SBA loans into conventional debt.
2e) If I'm doing a tuck-in a few weeks after the initial acquisition, I assume the minimum equity requirement only applies to the first acquisition correct? The tuck-in can be 100% debt financed even if it closes just a few weeks later? - If you are doing them that close together, then you really need to get them both approved at one time and the same equity would likely apply. You would likely need some seasoning for a lender to recognize it as a tuck in acquisition. If the lender does them both that close together I think the SBA will see them as both initial purchases. 3) In practice, assuming you have a sufficient DSCR and are buying cheaply enough, are most SBA lenders OK with 5% down by combining sellers note and SBA loan, or is this only technically possible but not typically something SBA lenders would underwrite? - We have plenty of lenders that will do 5% down if the cash flow works and the seller note is on standby for the first two years. 4) When you use a lending brokerage like Viso, do the fees they charge the lender get passed through to the customer economically through let's say higher fees? Or is it genuinely no cost to the searcher? - Our lenders are paying us out of their backend profit. You cannot raise fees or change fees on SBA loans. The majority are paid through to the Federal government and can only get changed by the Federal Government. In theory the rate could be impacted, but we typically do not find this to be the case and usually end up getting our clients competitive or lower rates due to the volume we run past our lenders. 5) What are typical financing fees all in for an SBA loan? I have heard of people with pretty sizable fees at close but the guaranty fee seems small from my research. What other fees exist and how much? - The main cost is the SBA guarantee fee. For loans under $1 million there is no fee. $1 million to $2 million it is 1.50% to 1.75% of the guaranteed portion of the loan (70% of the loan amount). For loans above $2 million it goes up to 3.75%. Keep in mind the SBA fees and closing costs are rolled into the SBA 7A loan so you do not need to bring cash out of pocket at closing to cover these costs. 6) If I have a seller note that PIKs at 7%, does the non-cash PIK interest get included in DSCR or is it strictly cash interest that is incorporated? - Required monthly payments on any seller debt typically get included in the DSCR. 7) I understand that the amort schedule for SBA loans is such that you should have equal payments over the life of the loan if the interest rate were flat (vs TLBs that just take 1% amort off the initial balance), with more principal in the early periods and less principal later. When the variable rate flexes up and down, does the principal payment schedule stay flat while the interest fluctuates, or does the amortization schedule get reset? If you do an add-on to your existing SBA loan, I assume you create an amort schedule for that tranche that aligns to the initial loan's maturity? - Most lenders either quarterly or annually re-amortize the loan based on the remaining loan term, current interest rate, and remaining principal balance, so your payment would adjust at that time. If you borrow more money in the future, it would be on a separate SBA 7A loan that would have its own amortization and would adjust the same way. 8) I understand in many cases, EBITDA declines in the first year as the operator is getting a handle on the business and may need to invest in G&A, and they're often able to grow back within a year or two. In the event of an EBITDA decline like this, how difficult is it to still execute on a tuck-in acquisition strategy and secure an incremental loan during this period, assuming PF DSCR will still be###-###-#### 5x, particularly where the tuck-in is actually boosting PF DSCR vs without the tuck-in? - It depends on if any expenses are one-time in nature or not. You can add back one-time expenses to cash flow, but if the business sees a legitimate drop in cash flow, it would likely make it harder to complete a tuck-in-acquisition. Lenders are going to want to see successful performance and know you are capable of continuing to run the existing business before funding another deal. 9) Do the low default/bankruptcy rates cited by many exclude or include Offer in Compromise situations? - Include. Those would fall under default rates because there is still a default on the loan. The Offer and Compromise is a settlement of the default, but the default still occurred. 10) Are there any covenants in the credit agreement that limit your ability to raise management salaries? - Typically no. The vast majority of SBA lenders do not include financial covenants in their loan documents for SBA loans because the SBA makes it almost impossible for a Bank to enforce those covenants if the Borrower is current on the loan. However, you need to keep in mind you have a personal guarantee on the loan, so it is not in your interest to drain the business of cash flow unless there is more than sufficient cash flow to support the business and also justify a higher salary. 11) Is 45% a market tax rate assumption for allowable tax distributions? - If it is an S-Corp, LLC or partnership, then you need to look at what your personal tax rates would be on any income to be distributed. However, before figuring that out you need to remove interest and depreciation from cash flow. If you are a C-Corp, then you need to use the appropriate tax rates for any remaining net income after all expenses including depreciation, interest and amortization. 13) What are typical friction costs from refinancing SBA debt with conventional? - not sure what you mean by "friction" but usually the cost is going to be some sort of lender fee or documentation fee, anywhere from a few hundred dollars to 1% of the loan amount, as well as any credit report fees, background check fees, outside legal fees if the relationship is complex or large enough the Bank does not want to document it in-house, UCC search fees, and filing fees.
I hope this answers most of your questions. I am happy to jump on a call to go through these or any others in more detail. You can ping me here or directly at redacted Good luck.
from University of Missouri in Kansas City, MO, USA