Self-funded bridge loan or pref

December 22, 2025

by a searcher from Duke University - The Fuqua School of Business in New York, NY, USA

Hi team, I am reviewing two businesses that are experiencing meaningful EBITDA growth yoy and recognize that the banks / SBA will not give full credit for LTM or 2025 until it seasons a bit. I am brainstorming alternatives to “over-equitize” the deal without having that equity trapped at the business. I am not sure whether this makes sense, but has anyone considered a self funded loan or pref as part of their structure (in addition to their common equity) as a bridge that can be taken out in 6-12 months? Thought that could be easier than asking the bank to fund an ordinary dividend recap on common equity in 6-12 months.

1 Like

4 Replies

66 Views

Replies

Reply by an investor
from University of Virginia in Tampa, FL, USA

This is a very common issue that searchers at SMBootcamp experience, and one key deal screening tactic we teach is to approach deals like this with caution. The issue is that the most recent year's DSCR may be sufficient for lenders, but it's very likely the 2nd and 3rd year back (necessary for underwriting) won't have sufficient DSCR because the business was just smaller from a profit perspective. There are various alternatives, i.e. a private bridge loan like you suggest. I find that hard to raise and relatively rare (in fact, I'm not sure I've ever seen it directly). Other options are: a slug of mezz debt junior to the SBA loan (also hard to get on micro acquisitions i.e., SBA deals), increase the seller financing (and add a forgiveness mechanism), or just simply raise more equity - which, in this case, would be my strong suggestion because situations like this are exactly how searchers get in trouble (e.g., the business reverts to the previous level of SDE or EBITDA and immediately the cap structure is untenable). Strongly recommend conservatively financing (more equity)!!

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Happy to discuss strategies. You could also do a forgivable seller note based on future performance. You can reach me here or directly at redacted to discuss options.

+2 more replies.

Join the discussion