SBA loan interest rates have risen dramatically in 2022 as a result of the tightening measures implemented by the Federal Reserve Bank, which sets the prime rate to which SBA loans are pegged. SBA interest rates were a max of 6% in early 2022. Now in Q4, rates are 9.75% and virtually all experts see rates going even higher in the coming months.
While rates have risen dramatically, we have yet to see business valuations (i.e., the purchase price for a business) reset. Interest rates and valuations are inversely related – the higher the interest rate, the more the debt payments incurred by a buyer. As a results, buyers traditionally pay less for businesses since the lowest form of capital — senior debt — becomes more expensive and buyers have to put more cash (equity) into their deals.
A borrower used to be able to finance 6.25x cash flow (EBITDA) to acquire a business. Now they can only finance 5.3x times. What we haven’t seen yet, which we typically do see, is valuations buyers are willing to pay sellers will go down commensurate with the amount of leverage (i.e., debt) that can be put on a business. With financing multiples going down roughly 1x cash flow (from 6.25x – 5.3x), sellers should expect their purchase price (valuation) to go down by the same amount. For example, a business that sold for $600,000 on earnings of $100,000 in Q1 would be expected a buyer in today’s market would only offer $500,000.
Our handy SBA Loan calculator can help you determine what the loan amount will be on a typical loan in this environment. Keep in mind that SBA bankers will want to see a cushion of excess cash flow >= 115% to 120% the loan amount. For example, annual loan payments of $156,924 will require annual profits (aka EBITDA) of $188,309. A good rule of thumb in today’s market is SBA lenders will lend ~5.3x cash flow. For example, a buyer an finance a business with profits of $100,000 with $530,000 in a 10-year SBA loan. If the purchase price for the business is $700,000, the SBA bank would lend ~ $530,000 and the buyer/borrower would need to inject $170,000 into the trasaction.
On a $1,000,000, 10-year term SBA loan here are the numbers now versus in Q1:
| Q1 2022 | Q4 2022 | |
|---|---|---|
| Max interest rate | 6.00% | 9.75% |
| Monthly Loan Payment | $11,102 | $13,077 |
| Annual Loan Payment | $133,224 | $156,924 |
| Yr. Profits (EBITDA) Needed | $159,869 | $188,309 |
| SBA Debt / EBITDA | 6.25x | 5.3x |
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