Seniority of SBA loan vs. Seller Note

searcher profile

October 15, 2020

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Hyderabad, Telangana, India

I am a bit confused on this and would appreciate answers. I believe SBA loan is senior to the Seller Note. Wouldn't there be a conflict then between these two funding sources since the loan payback period (say 10 years) is in most cases longer than the note terms (say 3 years)? Would the SBA loan covenants prevent me from paying off the Seller Note earlier?

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commentor profile
Reply by a lender
from University of Missouri in St. Louis, MO, USA
If you need to negotiate this with the seller don’t be afraid of a balloon on their note. After 24 monthly payments it is eligible for a refinance with another sba loan. That is a great bargaining chip if you want the seller to take on some of the risk. Just have language protecting you if the balloon cannot be repaid due to degradation in the financials
commentor profile
Reply by a lender
from Nova Southeastern University in Lancaster, PA, USA
Regarding your last question. When there are multiple lenders it's not unusual for the lenders to sign an "intercreditor" agreement. If a company misses their covenants on their senior debt, it isn't unusual for the loan docs to allow the senior lender to stop distributions to those behind them. Including payments on mezz debt or distributions to owners.
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