With all of the excitement of buying a business, variable rate loans can sometimes add some anxiety. Loan terms vary from bank to bank. Generally, interest rates on a 10-year SBA loan will adjust quarterly as a function of the prime interest rate — typically prime + 1.75-2.25%. Let’s look at an example to understand what impact a rising interest rate might have on your income.
[av_table purpose=’tabular’ pricing_table_design=’avia_pricing_default’ pricing_hidden_cells=” caption=” responsive_styling=’avia_responsive_table’ av_uid=’av-ni45c’] [av_row row_style=” av_uid=’av-6exlmg’][av_cell col_style=” av_uid=’av-6a6fl4′]Acquisition Price:[/av_cell][av_cell col_style=” av_uid=’av-627v88′]$700,000 [/av_cell][/av_row] [av_row row_style=” av_uid=’av-5xdlb4′][av_cell col_style=” av_uid=’av-5pdfuo’]Discretionary Earnings:[/av_cell][av_cell col_style=” av_uid=’av-5lq488′]$231,000[/av_cell][/av_row] [av_row row_style=” av_uid=’av-j4atk’][av_cell col_style=” av_uid=’av-55eetk’]Buyer Down Payment:[/av_cell][av_cell col_style=” av_uid=’av-50fnmw’]$175,000[/av_cell][/av_row] [av_row row_style=” av_uid=’av-4xfdhk’][av_cell col_style=” av_uid=’av-4nno80′]Bank Loan:[/av_cell][av_cell col_style=” av_uid=’av-4lfxuo’]$525,000[/av_cell][/av_row] [/av_table]
[av_table purpose=’tabular’ pricing_table_design=’avia_pricing_default’ pricing_hidden_cells=” caption=” responsive_styling=’avia_responsive_table’ av_uid=’av-4d0nn4′] [av_row row_style=” av_uid=’av-47v8hk’][av_cell col_style=” av_uid=’av-43gxew’]Interest Rate: [/av_cell][av_cell col_style=” av_uid=’av-3yobog’]5.5%[/av_cell][av_cell col_style=” av_uid=’av-3pz9m8′]6.5%[/av_cell][av_cell col_style=” av_uid=’av-3imjiw’]7.5%[/av_cell][/av_row] [av_row row_style=” av_uid=’av-3fpa68′][av_cell col_style=” av_uid=’av-3abkeo’]Annual Payments:[/av_cell][av_cell col_style=” av_uid=’av-30cx54′]$68,376[/av_cell][av_cell col_style=” av_uid=’av-2v33t4′]$71,532[/av_cell][av_cell col_style=” av_uid=’av-2sk7fk’]$74,784[/av_cell][/av_row] [av_row row_style=” av_uid=’av-2iotg8′][av_cell col_style=” av_uid=’av-2fm8qo’]Cash Flow to Buyer[/av_cell][av_cell col_style=” av_uid=’av-86rds’]$162,624[/av_cell][av_cell col_style=” av_uid=’av-22yhc0′]$159,468[/av_cell][av_cell col_style=” av_uid=’av-1xar88′]$156,216[/av_cell][/av_row] [av_row row_style=” av_uid=’av-1tfivs’][av_cell col_style=” av_uid=’av-1m7n68′]$ Difference[/av_cell][av_cell col_style=” av_uid=’av-1fescw’][/av_cell][av_cell col_style=” av_uid=’av-16d6wo’]$3,156[/av_cell][av_cell col_style=” av_uid=’av-12k9w8′]$6,408[/av_cell][/av_row] [av_row row_style=” av_uid=’av-uh56o’][av_cell col_style=” av_uid=’av-snph4′]% Variance[/av_cell][av_cell col_style=” av_uid=’av-jsh6w’][/av_cell][av_cell col_style=” av_uid=’av-1ou34′]-2%[/av_cell][av_cell col_style=” av_uid=’av-93g2w’]-4%[/av_cell][/av_row] [/av_table]
Today’s rates commonly allow for an initial interest rate of 5.5% on an SBA loan. The table above describes the impact of successive increases to 7.5%. Under this scenario, amortization costs on a loan of $525,000 could increase by only $6,408 on an annual basis, which would translate to a minimal reduction in income if all else is equal.
Typically a buyer will pursue a business in part because of anticipated growth — perhaps at the rate of 10% per year — then the threat of interest rate increases of this nature won’t be more than a blip on the distant horizon. To learn more about buying or selling a business, please contact one of our Apex Business Advisors.
Paul Temme
Senior Advisor