Banks are cracking down on SBA loans (here’s how to get around it)

If you’ve been keeping your ear to the ground in the small business acquisitions world, you might have heard:

The credit environment, especially from the SBA, has gotten a little tighter.

Over the last few months, the big banks that give out SBA loans have been pushing for business-buyers to structure deals with:

• More equity and less debt

• More seller financing

• A lower debt-to-income ratio

The banks want to see more creativity and risk on the buyer’s side across the board.

The narrative about this on the internet is doom-and-gloom, as usual.

But I actually believe this won’t be a big deal if you’re looking to buy a small business right now.

Why?

One simple reason.

The main number these banks are getting strict on is the DSCR (debt service coverage ratio).

This is the yardstick they use to determine whether a business-buyer will be able to generate enough cash to cover their debt obligations.

But here’s the thing:

If you were thinking of buying a business that only barely met the DSCR ratio requirements before the banks started raising their threshold... and then the banks raised the threshold by a few points, and now they won’t approve the loan...

You probably should never have been trying to buy that business in the first place.

It means you’d be scraping by on the skin of your teeth on that deal anyway.

Also:

The way I teach my students to assess deals inside Acquisition Ace, this is a non-issue.

Because when putting together financial projections for a business, we’re not only asking “what is the best-case scenario”...

But also “what is the worst-case scenario?”

Maybe you expect a business will grow 10% year-over-year.

But what if it ends up being -10%? -15%? Or even -20%?

You should account for all of this in your projections.

You should even look at businesses in that same industry and see how they performed during the last recession. If it was -3%, then put -5% in your projections, and so on.

If in the worst case you know you’ll still be able to pay off your loans no problem, then you have a strong deal on your hands.

And by extension...

If you follow this process every time you look at a deal, then the banks tightening up their credit lending standards should not affect you.

Want me to send you high-quality deals?

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Any time I come across acquisition opportunities that I think my subscribers might be interested in, I send out a broadcast to that list with the details.

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Onward,

— Ben Kelly