Back to Resource Center

Variable rate SBA debt: a tale of caution from deals we've seen

By William Fry

Nov 19, 2023

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:

  1. 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!!

  2. 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.

Considering buying a business?

Join the Mainshares Operator Network


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.

Financing

Get the latest in your inbox

Join our monthly SMB newsletter. It's free and not annoying.

© 2024 Mainshares, LLC. All rights reserved.
Disclosure:

This website (the “Website”) is owned and operated by Mainshares, LLC (“Mainshares”). By accessing the Website and any pages thereof, you agree to be bound by Mainshares’ Terms of Service and Privacy Policy, as well as the Terms of Service and Privacy Policy for Main Street Securities, LLC (“Main Street”). The information contained herein is provided for informational purposes only and is not intended to influence any investment decision or be a recommendation for any investment, service, product, or other advice of any kind, and shall not constitute or imply an offer of any kind. The products and services offered by Mainshares are not offered by a certified public accountant (“CPA”) and should not be considered as a substitute for services provided by a CPA.



Broker-dealer services provided in connection with some of the investment opportunities on the Mainshares platform are offered through Main Street, a registered broker-dealer, affiliate of Mainshares, and member of FINRA/SIPC. For additional information, please contact your licensed securities representative of Main Street Securities LLC or visit FINRA’s BrokerCheck. If the investment opportunity does not include the "Brokered by Main Street Securities" designation, broker-dealer services were not provided in connection with the offering through Main Street.


Neither Mainshares nor Main Street Securities LLC make investment recommendations and no communication, through this Website or in any other medium should be construed as a recommendation for any security offered.


Should you be presented with an investment opportunity, such investment opportunities involve private, unregistered securities that are speculative and involve substantial risk. These investment opportunities are conducted in accordance with an exemption from registration, specifically relying on the private offering provision outlined in Section 4(a)(2) of the Securities Act of 1933, along with compliance with Rule 506 of Regulation D. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. There is always potential to lose money when you invest in securities or other financial products. Private placements lack liquidity and distributions are not guaranteed. You are strongly encouraged to seek professional advice prior to entering into any transaction for any securities and to consider your investment objectives and risks carefully before investing.


Neither the SEC nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided herein or through any references/links herein. There can be no assurance that any valuations provided by issuers are accurate or in agreement with market or industry valuations. Neither Mainshares nor Main Street Securities LLC make any representations or warranties as to the accuracy of such information.