When do folks refinance after SBA acquisition?

January 22, 2023

by a searcher from University of Pennsylvania - The Wharton School in Boulder, CO, USA

Closed a self funded deal last year with SBA financing. Given current SBA rate environment it seems like a reasonable thing to look for alternatives.

Is that too soon after an acquistion?
How much history is needed operating for debt financing?
I’ve had a few folks interested but I felt like waiting with a bit more history and growth there could better structure available. Is that right?
Any other tips?

Thanks

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

Garth - I would be happy to have a discussion our your current situation. To provide some background, we are a Commercial Loan Brokerage Shop with over 500 different funding partners. As a general rule, most Borrowers struggle to refinance early on due to the 10 year term provided by the SBA. Most conventional banks will not term out debt for more than 5 years, so even with a lower fixed interest rate, the difference in amortization with the SBA 7A loan is likely going to mean your cash flow is stronger at the higher interest rate.

The other issue you are going to run into with a conventional lender is whether there is enough collateral in the deal. Most conventional lenders look to be fully collateralized and not all will do asset light deals. If you had a lot of goodwill in your acquisition, that is going to make it hard to get a conventional lender on board with a refinance as most conventional lenders would look to assign an SBA guarantee when light on collateral. And you cannot, except in very rare cases, refinance an SBA 7A loan with another SBA 7A loan.

If you reach a point where you can cover the debt service at a 1.25x or greater debt service coverage ratio at a 5 year amortization and you have adequate collateral to support the loan amount, then you should be able to refinance. Keep in my adequate collateral is going to be after normal Bank advance rates to equipment value, inventory, accounts receivable, and real estate. If you are looking before you have hit those conditions, you are likely going to waste a lot of time. Lenders will almost always tell you they are willing to look at a deal because they have a pipeline to fill, but there are few Banks that will do an asset light deal or will do a business deal with term debt beyond 5 years. Again, happy to discuss your specific situation.

Reply by a lender
from University of Missouri in St. Louis, MO, USA

HI Garth, echoing Brad I think the main obstacle in a refinance is the collateral position. One of the main benefits and SBA loan offers a bank is some protection from liquidation if there is a collateral shortfall. If you make that position moot, then you can open up refinancing opportunities. This is both enshrined in most bank lending policies as well as pushed by the regulators so it is incredibly difficult to refinance and SBA loan. Additionally, many borrowers hope to refinance their SBA loan to get rid of the personal guarantee. While there are exceptions, the vast majority of small business loans have a PG on them. This will depend on the EBITDA and collateral position but PGs are the norm, not the exception, on conventional (non-SBA) small business loans.

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