Thresholds for non-PG Debt Financing

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July 17, 2023

by a searcher in New York, NY, USA

What are the minimum EBITDA and minimum tranche size thresholds where one can start to tap into debt financing that doesn't require a personal guarantee (non-SBA)?

What are typical equity cushion %'s for such deals?

What are typical terms and how do they differ from SBA loans?

Which lenders are in the business of making these smaller non-SBA loans?

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commentor profile
Reply by a searcher
from University of Tennessee in Nashville, TN, USA
It depends on the lender, the collateral, the loan size, your credit-worthiness, and your capital stack.

Most conventional lenders still require some form of personal guarantee for the portion that they are lending, albeit the restrictions relative to an SBA-backed loan aren't nearly as cumbersome. These lenders will generally lend up to 50-60% of the transaction price. If the business is asset-heavy, the lender can utilize those assets as collateral to minimize and/or eliminate your personal guarantee exposure. Once you exceed a loan size of $10M, some lenders will no longer require a personal guarantee. Your credit-worthiness plays a factor in every lending decision, but a conventional lender is more likely to require a personal guarantee to an inexperienced operator with no track record versus someone that is seasoned and can show past successes. Your capital stack will also factor into lending decisions and can minimize the lender's exposure to such a degree that they may not require a personal guarantee.

Financing is one of the greyest areas of acquisition until you have found a deal. The lack of clarity is directly correlated to the multiple factors that lenders consider when making a loan decision, their appetite for risk, and their preferred industries. Every lender has a sweet-spot, so I encourage phone-time and face-to-face engagement to learn which lenders do what.
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Reply by an investor
from Harvard University in Dallas, TX, USA
I had an 18m personal guarantee. When we exited a few years later I talked a lot to the bank and they said the pg was mainly so I wouldn't walk away if things got tough. It reduced as ebitda went up. I think it was 500k at the end. We had very low leverage though. The advantage was they were super fast on deals. We bought a bunch of things that weren't profitable that we would sort almost overnight. They were fine with everything and did some due diligence that we ended up making our default. The original one was 2012, the exit was###-###-#### Our lender was an insurance specialist called oak street.
I honestly wouldn't have a clue at terms and conditions today. I think the high base rates and the bank failures have made them entirely up in the air. I know searchers I've invested in go to 50 banks. I guess these days it's another search part of the search.
My overall point really is that you do get some advantages of the pg in being able to do deals more easily and it being a lighter touch on ongoing financial document provision. I can't really compare it to sba as although I've invested in a few, I'd view advice as best from those who've actually signed one and operated under it
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