SBA Loans and Net Working Capital Adjustments
November 30, 2023
by a searcher from Texas A&M University in Dallas, TX, USA
I know that causing the purchase price to be adjusted via NWC being above the peg causes issues. Namely, that the loan is now potentially for a higher amount, with the buyer needing to bring more cash to the closing table.
What mechanisms can be used to handle this for SBA loans? Are post-closing true ups typically allowed?
Here's an example: let's say there's an inventory peg set at $100k. At closing, the business has $150k total inventory. The buyer doesn't have $50k to pay the seller at closing, and the bank doesn't want to (or can't for DSCR reasons) increase the loan. Will the lender allow $100k of inventory to be included at closing, with the remaining $50k retained by the seller and purchased by the buyer as it's used?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
1) Have an escrow being set up at closing that handles some concerns including those related to fluctuations in NWC. Usually the escrow account cannot last beyond a year and typically the lender ends up being a party to the escrow account, meaning if any adjustments are made any cash to go back to the borrower must then go back to the Bank to pay down debt post closing (the SBA does not allow a Borrower to get cash back out of the loan that was not approved up front for working capital). But by doing this you can account for some potential future changes and make those adjustments post closing.
2) Set a date, roughly a week or two before closing to make the final determination on NWC. That way you can finalize and fund your loan based on the NWC determination a week or two in advance. And make it so the seller cannot change it against you during the final two weeks, meaning they have to maintain that level of working capital up until and through closing.
3) If the NWC adjustment is in inventory, we have seen lenders allow the seller to carry back excess inventory post closing and then allowed the buyers to purchase that inventory over time.
4) If the NWC adjustment is in A/R, have the seller keep a portion of the A/R if over, and leave a portion of the A/R with the buyer if under. Retaining more of the A/R or less of the A/R will not materially change the deal from an SBA perspective. Even if the buyer does not physically keep the A/R, anything the buyer collects post closing on behalf of the seller the buyer can technically pay it through because the buyer collected it on behalf of the seller and it was the seller's A/R to begin with. That is not seen as an additional payment on the sale.
There are likely some other ways to resolve this issue that my brain is not recollecting at this moment, but hopefully the above gives you some strategies to work with these adjustments on SBA loans. If you have additional questions you can reach me here or directly at redacted Good luck.
from Transylvania University in Nashville, TN, USA