Variable rate SBA debt: a tale of caution from deals we've seen
By William Fry
Nov 19, 2023
In Buying a Business
With the Fed rate sitting at 5.5% and the Prime rate at 8.5%, we're seeing SBA loans being issued at 10-11%. That's a massive increase from the interest rates on SBA loans just a few years ago.
As most buyers know, SBA lenders typically issue loans with variable rates, meaning the rate will go up and down as the prime rate is adjusted.
For existing buyers, that means they feel the pinch of higher rates with higher debt service. For new buyers, it can be tempting to predict a lowering of rates leading to lower debt service in the future.
When trying to compete against other buyers to win a deal, some searchers may find themselves trying to rationalize high offer prices with future rate decreases.
If you ask Wall Street, opinions are divided. Some project huge rate cuts. Most project rates to fall a little bit - by about 1 point - by the end of 2024. But other firms are more pessimistic. Bank of America and Goldman forecast rates to stay at current levels through the most of 2024.
Over the past few weeks, I've seen a few searchers make aggressive SBA-backed offers with the rationale that rates will fall in 2024, giving them a larger DSCR cushion than appears today.
I would caution against that logic for two reasons:
The world is a chaotic place
If the experts can't even agree, I would be hesitant to weigh in with a PG on the line. In any case, your competitive advantage should be operating a business. If your competitive advantage is predicting interest rates, you should start a hedge fund! There are better ways to monetize your skill than an SMB!!
Rates are increased for a reason
The goal of the hikes is to tame inflation and cool the economy. SMBs are very much part of the economy. Given that interest rates are a pretty blunt tool, it can take time for the economy to feel the impact of the Fed's hikes. That "impact" can show up on your door pretty quickly once it comes: lower spending by consumers > lower revenue for your SMB > less money to pay SBA debt.
Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.
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