Using own money vs debt with bank

October 12, 2024

by a searcher in Kansas City, MO, USA

I’m curious to hear various opinions.

I have cash available to purchase a $5M EV business in a taxable brokerage account (in addition to retirement accounts). I’m 38, not ready to retire yet.

Something feels comforting (for lack of a better word) with a more traditional route using SBA loan for $4 million and only $1M of my personal capital, though strictly financially speaking it makes more sense to not use debt with higher interest rates.

What would you do in my shoes?

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

Great question. Although I do not disagree with Tim above that you could probably get approved with conventional bank financing where the interest rate would be slightly better, you would lose some of the benefits the SBA provides. Most conventional lenders are going to want substantially more down than 10% and you would likely have a loan term that is less than the 10 years provided by the SBA. In addition, you would likely have financial covenants on the loan that the SBA does not have, which means the lender could call the loan in the future based on performance. Depending on the type of company you are buying, if the deal is substantially under-collateralized a conventional lender might required substantially more down. Again, it is an option and if you are willing to put more down it might work well for you. Happy to get on a call to look at the specific deal and request in more detail and provide advice. You can reach me here or directly at redacted

Reply by a searcher
from University of Virginia in Dallas, TX, USA

Personally, I’d utilize the SBA 7a or commercial loans for funding rather than 100% equity. In your example of $1MM equity and $4MM debt for a $5MM EV company, after the debt is paid off, even with no improvements/growth within the company, your equity is now worth $5MM vs. $1MM at acquisition simply due to financial engineering. Whereas if you acquire using $5MM in equity, you see zero capital gains. Yes, debt adds some additional risk on the business, but it significantly increases the upside. If you’re worried about high interest rates, look for a variable rate loan. If you’re worried about the personal guarantee if the company goes bust, look for a commercial loan without a personal guarantee rather than an SBA loan.

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