Funding a partner buyout at a small firm: term loan vs SBA

The situation

A partner is retiring, relocating or leaving. The partnership or operating agreement sets a formula, or the partners agree a number, and the departing partner wants that number on a date. The remaining partners do not have it in cash, and should not drain the operating account to find it — the firm still has payroll on the 15th and clients who pay on day 45. The question is whether to fund the buyout with a term loan or an SBA 7(a) loan. Both are eligible. They differ in cost, speed and paperwork.

Term loan

A term loan from Billable Capital runs $50,000 to $5,000,000 over 6 to 60 months, fully amortising, with a fixed monthly or bi-weekly payment. Files up to $500,000 are underwritten in-house, with a decision in 3 to 7 business days and no prepayment penalty. Above $500,000 the file is packaged and placed with a bank lending partner, identified to you in writing before you sign.

• Credit: 650 minimum FICO for the guaranteeing partners. 24 months in business. $40,000 a month in deposits.
• Paperwork: six months of bank statements, two years of business tax returns, a YTD P&L and balance sheet, a debt schedule, and the redemption or purchase agreement.
• Speed: 3 to 7 business days to a decision. Realistic when the departing partner’s date is weeks away, not months.
• Cost: mid-range. For scale, a $250,000 in-house term loan over 36 months at an illustrative 14% APR is $8,544 a month and $57,599 in total interest — an illustration, not an offer.

SBA 7(a)

A change of ownership between existing owners is an eligible SBA 7(a) use. Billable Capital packages the file and places it with SBA-preferred bank partners; we do not make SBA credit decisions. $50,000 to $5,000,000, up to 10 years on a buyout, 10% down where an injection is required, 680 minimum FICO, 24 months in business. SBA Express closes in 10 to 21 days and is capped at $500,000; a standard 7(a) takes 30 to 45 days.

• Credit: 680 minimum FICO. Personal guarantee from every owner of 20% or more — the SBA requires it.
• Paperwork: three years of business and personal tax returns, YTD P&L and balance sheet, debt schedule, SBA Forms 1919/1920, the partnership or operating agreement, the buyout agreement, and a valuation basis for the number.
• Speed: 30 to 45 days on a standard 7(a). Only realistic if the departing partner’s date allows it.
• Cost: the lowest of the five products. A 10-year amortisation produces a far smaller monthly payment than a 36- or 60-month term loan on the same amount. For scale, $720,000 over 10 years at 10.00% is $9,515 a month before the SBA guaranty fee and closing costs — an illustration, not an offer.

Side by side

• Pick the term loan when the date is inside 30 days, the number is under $500,000, the partners’ credit is between 650 and 680, or the firm wants the option to prepay from a strong year without penalty.
• Pick SBA 7(a) when the partners have 680+ credit and three years of filed returns, the date is 45 or more days out, and the lowest monthly payment matters more than speed — which, over ten years, it usually does.
• Pick both, in sequence, when the date is soon but the firm qualifies for SBA. A term loan closes the buyout on time; the SBA file is built in parallel and, where the lender permits, refinances it. Ask about this structure before signing anything — not every term sheet allows it.

What lenders look at in a buyout file that they don’t in an ordinary loan

1. Whether the firm can carry the payment after the departing partner’s compensation comes off the books. Often it can — the clients stay, the draw stops — and showing that clearly is most of the file.
2. Client retention. Who the departing partner’s clients are, whether engagement letters are with the firm or the individual, and whether a transition period is agreed.
3. The valuation basis. A formula in the agreement, a multiple of fees, or an independent valuation. SBA lenders in particular want to see how the number was reached.
4. Seller carry. If the departing partner is carrying part of the price on a note, both products treat that favourably; SBA has specific rules on how a seller note sits behind the loan.
5. Personal guarantees. From the remaining partners on either product. There is no buyout structure that avoids them.

What not to do

Do not fund a buyout with a short working capital advance unless it is a bridge measured in weeks. An advance is the fastest product and the most expensive, built for a payroll gap or a case cost, not a five-figure monthly obligation that outlasts the term. And do not drain the operating account to pay the departing partner in cash and then borrow to replace it; underwriting reads the drained account as weakness. Borrow for the buyout, keep the account whole, and send statements that show a firm in control of its timing.