Talking to a friend yesterday, he mentioned he’d been quoted a 8.25% interest rate from a bank on an SBA 7a small business loan with a 10 year term. 8.25% is not locked, it’s floating. I started thinking about how much that is going to impact people’s ability to purchase businesses.
I started with a 4.5% rate that I was quoted last year1, then looked at the deal at 8.25%, then again at 10%, and stress tested it at 12%. I assumed a profit of $1m for the company being purchased with a 4x multiple making the purchase price $4m. With a 10% down payment and no seller’s financing that leaves a loan of $3.6m. I looked at both a 7 and 10 year term. In my experience, banks like shorter terms than the SBA rules offer but maybe your experience is different. Here are the numbers I got plugging in the details at https://www.calculator.net/loan-calculator.html:
At 8.25%, the purchase still looks doable but if rates go a lot higher, it’s starting to look scary. Even at 8.25% your taking quite a bite out of your profit cushion. Remember these high rates could become a reality. At this point I’d say a 7 year term is not looking doable for my risk level. If we are moving into a recession that could get really scary. You have to assume a 25%+ drop in revenue if your business is at all cyclical. It doesn’t make all deals undoable but you don’t want to see profits after debt service shrinking as risk is going up. SBA 7a is still a great option but just know interest is going to take a bite out of you.
I know this is low but I have some really good relationships and shopped the rate aggressively.