What will the monthly payment be?
Model the debt service on an acquisition loan so you know exactly what the business has to cover every month before it pays you.
Estimate only. Actual rates, terms, and fees are set by the lender and depend on the business and your qualifications.
What to ask for in diligence, which numbers to verify against tax returns, and the terms worth negotiating. One email, no course.
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How is a business acquisition loan payment calculated?
It uses the same amortisation formula as a mortgage: the loan amount, the monthly interest rate, and the number of months. Every payment covers the interest accrued that month first, and whatever is left reduces the balance. Early payments are mostly interest. That matters when you are projecting the first year of ownership, because your cash position improves more slowly than a straight-line estimate suggests.
What interest rate do SBA acquisition loans carry?
SBA 7(a) rates are usually variable, set at the prime rate plus a spread the SBA caps. The spread depends on loan size and term, and the rate resets as prime moves. Ask any lender for the current rate and the cap, then model a rate two points higher than you are quoted. A deal that only works at today's rate is a deal that stops working.
How long are the terms?
Ten years is standard for a business acquisition with no real estate attached. When the deal includes commercial property, the term can stretch to 25 years, which lowers the payment substantially. A longer term costs more in total interest but leaves more monthly cash in the business, and in the first two years of ownership cash is what keeps you solvent.
How much can the business actually afford to pay?
Lenders generally want the business to earn at least 1.25 times its annual debt service. That ratio is the debt service coverage ratio, or DSCR. If your annual payments come to $120,000, the lender wants to see roughly $150,000 of cash flow available to cover them. Divide the annual debt service this calculator returns into the seller's discretionary earnings and see where you land before you fall in love with a listing.
What does this calculator leave out?
The payment is not the whole cost of the deal. Budget separately for the things that arrive alongside it:
- SBA guarantee fee, which is financed into most loans
- Closing costs, legal fees and the appraisal
- Working capital for the first months under new ownership
- Your own salary, which the business also has to cover
Common questions
What is a good debt service coverage ratio?
Lenders commonly look for 1.25 or better. That means the business generates 25% more cash than the loan payments require. Below 1.25 the deal usually needs a lower price, a bigger down payment, or a seller note to close the gap.
Does an SBA loan have a prepayment penalty?
For 7(a) loans with terms of 15 years or more, there is a declining prepayment penalty in the first three years if you repay more than 25% of the balance. Ten-year acquisition loans typically have none.
Should I put more than 10% down to lower the payment?
Sometimes, but cash in the business is usually worth more than a smaller payment. A buyer who puts 20% down and then cannot cover a slow quarter is in more danger than one who put 10% down and kept the reserve.