The payment on an SBA 7(a) acquisition loan follows from three things: the financed guaranty fee, a ten-year term and a variable rate.
Add the guaranty fee to the loan if it is financed, then apply the standard amortising payment formula over 120 months. On a 1,500,000 business bought with 150,000 down, the 1,350,000 loan plus a 30,375 financed fee comes to 1,380,375; at an illustrative 10.25 per cent over ten years the monthly payment is 18,433, or 221,201 a year. Against 330,000 of EBITDA that is 1.49 times coverage, and the first point of rate above that costs another 9,326 a year.
Worked in full in Buying a Small Business by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A buyer acquires a fictional service business with an SBA 7(a) loan. The rate and the fee rate below are illustrative: 7(a) rates are usually variable, set at prime plus a spread that SBA caps, and the guaranty fee schedule is published by SBA each fiscal year and tiered by loan size. Check both, and the current SBA SOP on terms, guarantee percentages and injection, for your own loan: the programme rules used here are illustrative and change.
| Input | Value |
|---|---|
| Purchase price | 1,500,000 |
| Buyer's equity injection, 10% | 150,000 |
| Loan before fee | 1,350,000 |
| SBA guaranteed share (loans above 150,000) | 75% |
| Guaranty fee on the guaranteed portion (illustrative) | 3.0% |
| Interest rate (illustrative, variable) | 10.25% |
| Term, business acquisition without real estate | 10 years |
| Business EBITDA after a market manager's salary | 330,000 |
A 10 per cent injection on the price alone is a simplification: lenders apply it to total project cost, including working capital and closing costs, which raises the cash needed, as worked in how much cash you need to buy a business with an SBA loan.
Guaranteed portion = 1,350,000 × 75% = 1,012,500
Fee = 1,012,500 × 3.0% = 30,375, 2.25 per cent of the loan
Financed into the loan: 1,350,000 + 30,375 = 1,380,375
Strictly, a financed fee is charged on a loan that already includes it, so the exact figure solves itself: fee = rate × guaranteed share × total loan. At these inputs the difference is a few hundred dollars; the companion workbook solves it in closed form.
Payment = L × i / (1 − (1 + i)−n), with i = annual rate / 12 and n = months
i = 10.25% / 12 = 0.8542%; n = 120
Payment = 1,380,375 × 0.008542 / (1 − 1.008542−120) = 18,433.39 a month
Excel: =PMT(10.25%/12, 120, -1380375)
Annual debt service = 18,433 × 12 = 221,201
In the first month 11,791 of the payment is interest and 6,643 repays principal. Over the first year interest takes 137,635 and principal 83,566, leaving 1,296,809 outstanding. Over the full ten years the buyer pays 2,212,007, of which 831,632 is interest.
Coverage on EBITDA = 330,000 / 221,201 = 1.49x
Coverage after maintenance capex of 25,000 = 305,000 / 221,201 = 1.38x
Both clear the 1.25 times that SBA lenders commonly look for, but the second is the one the buyer lives with. It still ignores income tax and any seller note, both of which come out of the same cash. The price this coverage can support is worked the other way round in what purchase price a 1.25x DSCR supports on an SBA loan.
A variable 7(a) rate typically resets with prime. The table holds the loan at 1,380,375 and the term at 120 months.
| Rate | Monthly payment | Annual debt service | EBITDA coverage |
|---|---|---|---|
| 9.25% | 17,673 | 212,080 | 1.56x |
| 10.25% | 18,433 | 221,201 | 1.49x |
| 11.25% | 19,211 | 230,526 | 1.43x |
| 12.25% | 20,004 | 240,053 | 1.37x |
The first point of rate adds 777 a month, 9,326 a year, and each further point a little more. Coverage on EBITDA only falls to 1.25 times at a rate of 14.68 per cent, so this loan is not fragile to rates; it is far more exposed to EBITDA, where a 10 per cent fall takes coverage to about 1.34 before capex.
Quoting interest only. 1,380,375 × 10.25% / 12 is 11,791 a month, which a buyer may read as the cost of the loan. It leaves out 6,643 a month of principal, 79,712 a year, and turns a 1.49 times coverage into an apparent 2.33.
Using a real estate term. A 25-year amortisation, available when the loan finances real estate, gives 12,788 a month. A business acquisition without property is generally limited to ten years, so the lower payment is not on offer.
Forgetting the fee. Financing the 30,375 adds 406 a month, small on its own, but it is part of the debt the buyer personally guarantees.
The book's lender case, with the loan that sizes itself around its own guaranty fee and ten years of coverage, is in the free workbook for this case, and a blank version is the small business acquisition model.
Generally ten years when the loan finances the business without real estate, which is why the payment is much higher than on a property loan. On an illustrative 1,380,375 loan at 10.25 per cent, ten years means 18,433 a month; a 25-year amortisation, available only where real estate is financed, would be 12,788.
It can be financed into the loan, and often is. The fee is a percentage of the guaranteed portion, 75 per cent of loans above 150,000. At an illustrative 3.0 per cent on 1,012,500 guaranteed, the fee is 30,375, which raises the monthly payment by 406 at 10.25 per cent over ten years.
Lenders commonly look for at least 1.25 times. In the illustrative case 330,000 of EBITDA covers 221,201 of annual debt service 1.49 times, and 1.38 times after 25,000 of maintenance capex. Coverage would only fall to 1.25 times on EBITDA if the rate rose to 14.68 per cent.
This article is one calculation from Buying a Small Business. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: corporate finance, valuation and markets → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.