Using own money vs debt with bank

by a searcher

2 months ago

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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searcher from University of Alberta

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2 months ago | like reply | 0 likes

searcher from University of Virginia-Darden - Darden School of Business

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.

2 months ago | like reply | 0 likes

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