SBA HOT TOPIC
Shared First Lien Pari Passu
SBA 7a financing allows the lender and the small business a great deal of flexibility in loan structure and use of proceeds. Sometimes due to complex variables within a loan structure, a shared first lien pari passu position may be an option, or it may be required.
One of the key advantages to the SBA 7a program is allowing multiple use of proceeds within one loan. This can include financing for real estate, leasehold improvements, equipment, working capital and goodwill. An opportunity may arise where the multiple use of proceeds exceeds the SBA 7a maximum financing amount of $5 million.
For example, a business acquisition that includes the purchase of real estate for $4 million, equipment for $2.5 million and goodwill of $3 million, can be a great pari passu candidate. By structuring the financing with a $5 million SBA 7a loan and a $2 million conventional loan with a shared first lien, the bank is able to extend to the customer a financing option that meets their needs and reduces the credit exposure to the bank. In this example:
- $5 million SBA guaranteed loan for 25 years, use of proceeds are $3.6 million real estate, $1.2 million goodwill and $0.2 million closing costs and working capital
- $2 million conventional loan, use of proceeds are for equipment with a OLV of $2 million
- Both loans are secured by a shared first lien pari passu on real estate and all business assets.
- Shared first lien is based pro rata on the outstanding principal balances; in this case 71% SBA guaranteed loan and 29% conventional loan
- Bank’s exposure is $3.25 million ($1.25 million unguaranteed portion of SBA loan and $2 million conventional loan)
An example of when a shared first lien pari passu structured is required is in the event of a business acquisiton transaction and the borrower is acquiring the small business’ real estate in a separate transaction with a non-SBA guaranteed loan. In this case the SBA guaranteed loan must receive a shared lien position on the real estate with the non-SBA guaranteed loan.
Using the above example, if the loan were structured with a non-SBA guaranteed loan for the real estate, say at $3.8 million and a SBA guaranteed loan for the remainder of the use of proceeds; then the SBA loan would be required to obtain a shared first lien on the real estate in order to remain eligible for the guaranty.
Structuring the loan use of proceed in these lending opportunities is best done upfront in the loan process to set the right expectations. One of the expectations that should always be set is an understanding of flexibility from all parties. Our goal is to find the best solution for the business borrower and the bank. An understanding of flexibility from all parties is needed as values for real estate, equipment and business value are only early estimates and subject to formal valuations. By establishing the basics of the structure and the spirit of shared risk between buyer, seller and bank, the process from application to closing can be more customer friendly.