The SBA 7(a) Capital Stack: What the Spreadsheets Get Wrong

When I started in the search space, I thought the structure was simple: 10% equity, 90% SBA loan. I built my first few models that way. Then I got on a call with a lender who asked me how I calculated my equity injection, and I realized I had been modeling it wrong on every single deal I had looked at. I have analyzed over 50 deals at this point. Sent IOIs on a dozen, LOIs on a handful. None have closed — some I was the lowest offer, some the seller took a cash buyer, some the broker went with someone they already had a relationship with. What that process has given me is a very clear picture of where SBA deal math breaks down and where most first-time buyers show up short in lender conversations. The capital stack is where it starts. - TPC vs EV — the mistake I made on my first ten models Your equity percentage applies to Total Project Cost, not Enterprise Value. TPC is EV plus closing costs. On a $3M deal with $120K in closing costs, TPC is $3.12M. Your 10% equity is $312K, not $300K. The SBA guarantee fee on a $2.8M loan is roughly $75K. It rolls into the loan, but it still affects your equity calculation because it is part of TPC. I was modeling off EV for the first two months of my search. Every model I built was short by $30 to $80K. The lender catches this immediately. You look like you have not done the basic work. - The seller note and what actually hits your DSCR Most SBA deals in the LMM have one seller note. It amortizes from day one, typically over 7 to 10 years, and it hits your DSCR calculation immediately alongside your SBA P&I. The thing I kept running into early on: brokers quote a DSCR that does not include seller note payments. On three separate intro calls, I asked for the DSCR the broker was modeling, and none of them had the seller note debt service in the number. Their figure looked clean. Mine came in 0.10x - 0.15x lower once I included it. Always ask directly whether the DSCR they are quoting includes seller note amortization. Most of the time, it does not. - Why Year 3 is the number that actually matters During the first 24 months of your SBA loan, you are paying interest only, not principal. On a $2.5M SBA loan at current rates around 10.5% that is roughly $21.9K per month. Once P&I kicks in at year three, it is around $33.2K per month. That $11K monthly difference is the gap between a 1.21x DSCR and a 1.43x DSCR. Year 1 clears 1.25x on almost every deal I have looked at because of the IO period. It tells you almost nothing about whether the structure is fundable. Year 3 is your real stress test. Model conservative CFADS — use your own replacement salary assumption, not the broker's — and check whether Year 3 clears the SBA floor. If it does, you have a structure worth taking to a lender. If it does not, you are repricing or walking before you spend a dollar on diligence. - What the actual cash at close looks like I have not closed a deal, so I am telling you what I have modeled and verified with lenders, not what I have lived. Equity percentage of TPC plus buyer legal, roughly $15K, plus any working capital you are funding at close, equals your actual cash required. On a typical $3M deal, it lands at $340K to $360K. Most first-time buyers I have talked to are budgeting $300K. The shortfall is not a surprise if you model TPC correctly from the start. Two lenders engaged on my last post, and both confirmed this is where they consistently see buyers come in short. The fix takes ten minutes once you know how to do it.