Top 5 Things to Know about Terms and Conditions for SBA Loans
1. Expected Rates and Terms
SBA loans offer interest rates at a maximum of 2.75% over prime. The rate floats for most loans and adjusts quarterly. You can get up to 10 year terms (amortization) for growth capital and/or business acquisitions. Terms are longer for real estate and certain kinds of equipment. Your loan officer should explain how to adjust and/or blend amortization to get the best loan for your situation.
2. Coverage Ratio
Calculate coverage ratio as the sum of debt payments and estimated taxes due, divided by the EBITDA of the business. Banks are generally satisfied with a debt service coverage ratio of 125%. You could go lower in certain circumstances, e.g., if the bank is hungry and you have a lot of collateral. But plan to hit 125% to make life easier.
3. Collateralization
You don’t need to have 100% collateralization of the loan using your business and personal assets. A coverage ratio over 125% can and should make up for your lack of assets to pledge against the loan. We’ve done deals with service businesses with fewer than $500K of assets on the balance sheet that were able to borrow several million dollars of term debt because of the experience of the borrower and their cash flow coverage. That said, every bank is a bit different in what they can do, and collateral matters more to some than others.
4. Buydowns
Buydowns aren’t an option with SBA loans. The SBA wants you to take it all right away or not at all. Before 2024, a one-hundred percent buyout of the owner is required by SBA, but there are new rules coming out to allow partial sale.
5. Balloons and Earn outs
These creative options would be nice, but neither is allowed in SBA lending. The standard operating procedures can be found here (they’re hefty, so find your bifocals). Here’s a secret: inventive ways around these limitations are found all the time.
We work with many SBA lenders. If you have any questions, feel free to contact us.
