What if the SBA Loan Cap Increases?

What if the SBA loan cap moves to $10 million?

There have been calls for this shift among the lender, buyer, and broker communities for some time as each sees it as unlocking a huge chunk of available new business.

That's generally correct - expanding the loan limit would allow more owners to exit, with more cash in hand, from more individual buyers than the current program allows.

But there are some interesting counterintuitive effects.

Valuations Won't Substantially Increase

Don't come at me with your supply and demand! I'm aware this is heresy.

Valuations in the $5M-$10M range are already higher than typical SBA deals and driven largely by funded buyers. Most SBA buyers won't be able to pay up for these deals and will be largely limited by their ability to service the debt.

In practice, we saw this when more SBA approvals became available at 10% equity injection versus 20% - the DSCR bar is high.

Private Equity Will Invest in New Ways

Private Equity and Strategic Buyers will continue their move down-market in search of opportunities.

We'll see these investments continue alongside a new model more closely aligned with the independent sponsor model today. With 90% SBA leverage, more private equity groups will choose to sponsor individuals to buy and operate businesses instead of operating directly.

A thriving ecosystem exists for this already, but the small check sizes on $5M purchases make it unattractive for most funds.

Demand for Growth Capital Will...Grow

Currently, the vast majority of SBA business buyers will never grow their businesses to a size that's attractive for growth capital investments.

Starting at $10M (realistically $2M-$3M EBITDA) presents an opportunity for entrepreneurs to grow into a size that now needs significant capital to expand. Regional expansion? Big R&D build? These become more attractive to investments at larger sizes.

What do we think? What else will change?