SBA loan with PG in year 1 but options to refinance out of PG in year 2
January 20, 2025
by a searcher from Columbia University - Columbia Business School in Princeton, NJ, USA
Hi,
I’ve been approved for an SBA loan with a personal guarantee (PG) to finance a $6M acquisition at just under a 4x EBITDA multiple. However, I’m looking to explore options for removing the PG in year two, even if it means refinancing at a higher interest rate or pursuing alternative structures.
What are the best options for refinancing out of the SBA loan while eliminating the PG? I’d love to hear from anyone with insights—especially those who have successfully navigated this process. Thanks!
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
However, to be up front with you, it is likely going to be a challenge to do a refinance that quickly. The reason most clients go SBA is because of the higher risk nature of the deal, the longer term the SBA offers, and the lack of hard collateral. Once you have been operating the business for a year you do take away the transition risk for lenders. However, unless the deal is largely collateralized by hard business assets and real estate, most lenders are unlikely to want to take any exposure against goodwill without a personal guarantee. In addition, typically speaking the terms from conventional lenders and many non-bank lenders on any deal with high goodwill exposure are going to be lower than the 10 years being offered by the SBA. That will typically strain cash flow. Lastly, the size loan you are talking about is often too small for most conventional lenders to do without a personal guarantee. Most conventional lenders in their small business banking groups or lower middle market lending groups almost always require a personal guarantee. There are some non-bank lenders out there that might consider something without a guarantee, but you are likely looking at a much higher interest rate and potentially much worse terms. Again, happy to have a discussion.. But there are limited non-guarantee options for the size transaction you are looking at and you should be aware it will not be easy to find a lender offering similar terms to refinance a deal without the guarantee as you have from the SBA loan.
from Brigham Young University in Dallas, TX, USA
SBA- PG Bank - usually PG in all forms for business acquisitions (regular bank loans or USDA loans). Could change a little if you have significant asset collateral Bank Sponsor Team - usually non-PG but need a deal with $4M+ of EBITDA. Differs by bank so you might be able to find something with differnt thresholds SBIC - usually non-PG but need a investment track record and a deal with $1M bare minimum EBITDA and 95% of SBICs have a $3M min ebitda threshold.
As you can tell the only real way to refi out of your loan will be to grow your business dramatically so you can tap into different pools of capital. Just keep in mind too that it's harder to refi than it is to get an initial deal done because lenders really want you to be putting in your cash at the same time they are putting their's in.