Working Capital in SBA Deals

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by a searcher from University of California, Los Angeles - UCLA Anderson School of Management
in Milwaukee, WI, USA

4mos ago

Working Capital in SBA Deals

I'm working on an SBA 7(a) financed stock purchase and the seller's broker claims "SBA will not allow working capital pegs." My LOI included a standard WC adjustment mechanism (target based on trailing 12 months, with purchase price true-up at closing). I've searched SOPredactedand can't find any prohibition—it appears silent on this issue, suggesting it's a private contractual matter. Has anyone successfully closed SBA deals with working capital adjustment clauses? Is this a legitimate SBA restriction or is the broker confused/strategic? Without this protection, I'm exposed to the seller draining cash pre-closing with no recourse. Reaching out to my lender but wanted a community gut-check first.

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reply by an intermediary 4mos ago
from The University of Chicago in Chicago, IL, USA

1) Broker is right IF, IF, IF one uses standard WC adjustment approach. ^redacted‌ has spelled out the main reason. Same reason why earnout is not allowed. He has also discussed few approaches. 2) WC definition varies by lender ...even within the same firm, two lenders could have different meaning of WC. Most all lenders say ... Oh, we always finance WC ... SBA is ok with WC. This makes it difficult to get a deal a done. 3) I have recently done SBA deals with WC adjustment. In each case, the language was adjusted to suit the business, and both lender and seller had to be convinced. We also had plans if WC adjustment turns out to be different. 4) Happy to help. Just DM.

reply by a searcher 4mos ago
from Georgia State University in Atlanta, GA, USA

I think folks have nailed it. This isn’t an SBA issue so much as a "who funds the float" negotiation. If the seller wants to strip AR and leave the tank empty, that’s effectively raising EV and asking the bank or you to backfill liquidity. SBA doesn’t forbid WC protection....it just hates last minute math. However you paper it (min cash, seller note mechanics, etc.), the business still needs oxygen on Day 1. Calling it “SBA policy” is just cleaner than saying “seller wants max cash out.”