Before we dive in, a quick note:

I have a business called SMB Business Plans that I run with my partner Joe Thomas. We help write business plans for business buyers looking to take out SBA Loans to fund their acquisitions. We know exactly what SBA lenders look for in a business plan, so we can write up a plan that will check all the boxes. Check it out here.

Welcome back to the Buyer Advocate!

Picture this: Bart is an aspiring pet product mogul with his eye on a bustling business in Springfield, Ohio.

This isn’t just any pet supply shop, though—the business includes a spacious warehouse filled with kibble, toys, and enough catnip to keep the local felines in a state of bliss for years to come.

He's going to buy the business and the real estate. This is exactly the type of empire Bart has always dreamed of running.

But he has one important question to answer first:

How should he structure his financing?

Bart’s conundrum is all too familiar.

When you’re buying a business and its real estate, SBA 7(a) loans give you two main options:

Option 1—two separate loans for the business and real estate

Option 2—a single loan with a blended term.

It’s a classic dilemma. Let's dive into the pros and cons do each option!

So today, let’s dig into Bart’s situation, break down his options, and maybe even throw in a joke or two. Grab your coffee, and let’s talk loans!

Bart’s First Option: The Two-Loan Tango 🕺💃

In the first option, Bart can take out two separate SBA 7(a) loans:

• Loan 1: A 10-year loan for the business itself.
• Loan 2: A 25-year loan for the warehouse.

Sources and Uses of Funds

This breakdown helps Bart know exactly where each dollar is going and (hopefully) puts his mind at ease.

Here’s a simplified Sources and Uses chart could look like for Bart:

Bart may have nodded off halfway through that, but stick with us—it’s about to get good.

Debt Service Analysis for Bart’s Business and Warehouse

If Bart goes with separate loans, his debt service would break down like this:

• 10-Year SBA 7(a) Loan (Business): $1,500,000 at 10.25% interest, annual debt service of about $237,504.
  ​
• 25-Year SBA 7(a) Loan (Warehouse): $1,000,000 at 10.25% interest, annual debt service of about $108,192.

Total Annual Debt Service: $345,696

And if Bart’s business generates a solid EBITDA (Earnings Before I’m Tired of These Acronyms) of $518,544, he’ll hit a cozy Debt Service Coverage Ratio (DSCR) of 1.50—just what we’re looking for.

Why Bart Might Go for Option 1

Pros:

• Freedom to Sell Separately: Down the line, if Bart decides he wants to sell the pet business but keep the warehouse as his own little doggy daycare (hey, people change), he’ll have the freedom to do so. We love this approach at Pioneer Capital Advisory because it keeps things flexible for the future.
• Asset-Aligned Terms: With the business loan on a 10-year term and the warehouse on a 25-year term, Bart’s financing matches the lifespan of each asset, giving him predictable payments tailored to each part of his operation.

Cons:

• More Paperwork: Yep, Bart’s got more forms to sign here. (On the upside, his signature will be perfected.)
  ​
• Two Sets of Fees: Each loan comes with its own set of closing fees, which can add up. So if Bart’s goal is to save every last penny, this might feel like a drawback. In this example, he'll pay more for closing costs and have less to put into net working capital.

The Verdict on Scenario 1:

If Bart’s vision for the future includes options (and maybe a few dogs in the office), going with two loans could be a smart move. The flexibility of keeping the business and real estate separate allows for all kinds of possibilities down the road, which is why this is often our top recommendation here at Pioneer Capital Advisory.

Bart’s Second Option: The One-Loan Wonder 🪄

If the two-loan dance feels too much like, well, dancing, Bart could opt for a single SBA 7(a) loan with a blended term, covering both the business and the real estate under one loan.

Sources and Uses of Funds

Here’s what Bart’s Sources and Uses might look like with a single, blended-term loan:

Debt Service Analysis with Blended Loan

With a single loan, Bart’s debt service would work out like this:

• Single Blended SBA 7(a) Loan: $2,500,000 at 10.25% interest, with a blended term of about 17 years, leading to an annual debt service of roughly $292,296.

To meet the target DSCR of 1.50, Bart’s business should be generating about $438,444 in EBITDA.

He’ll need that cash flow to keep things manageable.

Why Bart Might Choose Option 2:

Pros:

• Streamlined Simplicity: One loan means one monthly payment, one set of fees, and a little less paperwork. Bart can focus on building his pet supply empire without juggling loan administration.
• Lower Closing Costs: With just one loan, Bart can keep those pesky fees in check—he’s only paying them once, after all.

Cons:

• Lack of Flexibility: If Bart wants to sell the business but hold onto the warehouse (or the other way around), this structure could make it tough. When both assets are collateralized under a single loan, they’re essentially locked together.
• Term Based on Appraised Value: The SBA bases the loan’s term on the lower of purchase price or appraised value, so if Bart’s appraisal comes in low, his loan term could be shorter, pushing up monthly payments.

The Verdict on Scenario 2:

If Bart wants simplicity and is committed to running the business and owning the real estate as a combined asset, then this approach could make sense. But if Bart’s vision changes down the road, untangling the business from the real estate might be like separating two puppies who’ve been sharing the same bed since birth—challenging at best!

So, What Should Bart Do?

At Pioneer Capital Advisory, we’d probably recommend Bart go with Option 1 (the two-loan approach).

Why?

Because life happens, and businesses evolve. Maybe five years from now, Bart realizes he’s more into warehousing than pet supplies, or perhaps he’s offered a sweet deal to sell the business but keep the warehouse for future ventures. With separate loans, he has options and room to adjust as he grows.

Takeaway: When you’re financing a business with real estate, think beyond today’s needs. The structure you choose could impact your cash flow, control, and flexibility for years to come. So take a cue from Bart—whether you’re diving into pet supplies or another industry, always align your financing with your bigger vision.

P.S. If Bart’s scenario sounds familiar and you’re weighing your financing options, drop us a line at Pioneer Capital Advisory. We’re here to help you structure financing that works not just for today, but for the big picture. And we’ll try to keep it as pain-free (and maybe even a little entertaining) as possible.

Thanks for reading!

Last Note - I will be speaking at the Chicago Booth Kellogg ETA conference on Monday, November 4th and that tickets are still on sale. Get Tickets Here.​

​

Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

Thanks for reading! Feel free to reply directly to this email with any questions or thoughts.