Can a seller note have monthly payments alongside an SBA loan?
Short answer
Yes, but it then does not count as equity. Total debt for the purchase, including seller debt not on full standby, is limited to the business valuation and must fit debt service coverage. Source: SOP 50 10 8.1, App. 15, Para. A.
Yes, but only full standby seller debt counts as equity. A note with payments is ordinary acquisition debt. SOP 50 10 8.1, App. 15, Para. A, says the total debt supporting a change of ownership, including seller debt not on full standby, is limited to the business valuation amount. It must also be supported by debt service coverageCash available for loan payments, divided by those payments. Above 1 means the cash covers them. Full definition.
How it affects the deal
- It adds to debt service. Historical debt service coverage is earnings before interest, taxes, depreciation and amortization (EBITDA) divided by combined debt service after the transaction (App. 15, Para. C.2.b).
- The minimums still apply. The ratio is 1.25:1 for an Initial Acquisition and 1.15:1 for a Business Expansion.
- Interest-only notes get adjusted. If debt not on full standby pays interest only, the lender must apply an amortization of no more than 10 years (Para. C.2.b).
Refinancing later
Seller debt can be refinanced after it has been in place and current for 36 months. The note must be current and not on standby for that period, and the request must meet SBA's 10 percent payment improvement test (App. 15, Para. A.3.a). It must also not reduce the lender's exposure.
Earnouts
Seller earnouts are prohibited. Buyer rebates based on business performance are allowed, and rebate funds must pay down the 7(a) loan (App. 15, Para. A).
What the lender reviews
The lender must address seller financing and standby agreements in its credit memorandum (Sec. B, Ch. 1, Para. C.2.a). On 7(a) Small loans, the memorandum must cover the terms of any seller financing (Sec. B, Ch. 2, Para. C.2.a).
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